This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.
Towards the end of last week, the Financial Times published a piece declaring that emerging markets had been hit by their worst sell off in decades. The article, as you can imagine, was suitably gloomy about the prospects of those countries fitting within the emerging market bracket.
The trouble with these sorts of definitions is that they are not particularly nuanced. If you browse through the constituents of many emerging market indices, you’ll find countries like Taiwan, Hungary, and Brazil bunched together.
Although these places may share some characteristics, they probably have far more differences than they do similarities. Arguably the most advanced semiconductor manufacturer in the world, for example, is based in Taiwan. In contrast, companies in Brazil tend to skew more towards the commodities sector.
So even if they are subject to some similar market forces, it’s far from clear that investment trusts investing in emerging markets are all going to perform poorly in the near future. For example, BlackRock Latin America (BRLA) was the best performing investment trust in the entire closed-ended fund sector during the first quarter of this year.
That’s likely because it invests heavily in a mix of financial services and commodities businesses that could benefit from rising rates and prices. The Brazilian Real, which the trust also has substantial exposure to, has also gained close to 17% against the dollar in the year to date.
Other trusts have not fared so well but it’s also not clear that this is indicative of some long downward trend. For example, Ashoka India Equity (AIE) has seen its NAV drop in 2022. But the trust’s underlying holdings are not performing badly.
For example, tech firms Infosys and Mphasis were among the top detractors in performance for the trust in April. Both firms reported growth in sales and net income for the first quarter of this year. As that suggests, they are also profitable, so these are not the sort of money burning businesses that we saw going public during the pandemic.
Investors may believe that their higher valuations should come under pressure due to inflation and the prospect of rising rates. However, it’s hard to see the trends working in their favour, particularly increasing digitization, disappearing in the near future. And the focus on cash flows that AIE’s management team have may mean these businesses continue to deliver returns for shareholders in the long run.
It’s a somewhat similar story with Vietnam Enterprise Investments (VEIL). Vietnam has, at least thus far, managed to keep inflation below 2%. The country’s central bank refinancing rate is currently 4%, meaning people are also seeing real returns on their deposits.
Of course, it’s not clear that this will continue but it may be the case that the country can avoid some of the more extreme levels of inflation we’ve seen in other parts of the world. And as with AIE, companies in the VEIL portfolio are not performing badly. Moreover, 35% of the portfolio is currently in financial services businesses, which one would expect to benefit – to a point – from rising rates that may stem from inflation.
None of this is to suggest that these trusts are guaranteed winners but the idea that emerging markets are collectively doomed is one that lacks nuance. Like developed markets, emerging markets offer an array of opportunities to investors, with some more likely to succeed in an inflationary environment than others.
Past performance is not a reliable indicator of future results
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