Rebecca McVittie, Investment Director, Fidelity Emerging Markets Ltd (LON:FEML) writes in her article ‘Emerging Markets: Growth in a low growth world’ about the merits of emerging markets and believes they may emerge stronger and more resilient after this period of volatility has ebbed.
A time of global economic instability is not the moment most investors choose to look at emerging markets. High US rates and a strong Dollar are typically difficult for developing economies, while the Ukraine crisis has reawakened many investors to the perils of political risk. However, at a time when many of the world’s major economies are struggling, we believe emerging markets continue to offer compelling long-term structural growth opportunities and may be a bright spot of innovation.
For many investors, their view of emerging markets has been clouded by the experience of the last bout of rate rises in the US – the ‘taper tantrum’ of 2013. Countries with large Dollar denominated debt burdens suddenly looked vulnerable. The term ‘Fragile Five’ (Brazil, India, Indonesia, South Africa, and Turkey) was coined by Morgan Stanley to define the worst-hit economies.
Today, that has changed for a number of reasons: the commodities boom has been a significant boost to many emerging market countries, reviving their economies and allowing them to pay down debt. Emerging market countries were generally more restrained in their spending during the pandemic when compared to advanced economies, which has left them in a stronger financial position than more profligate developed markets. Combined, better terms of trade and a less interventionist path has created far greater resilience than in previous global downturns.
Emerging market central banks have also been quick to tackle inflation, acting ahead of the US, Europe and the UK in raising rates. Central banks in Latin America or Indonesia and India are well-versed in dealing with inflation, have raised rates quickly to limit outflows and may now be nearer the end of their monetary tightening cycle than the beginning. It is also worth noting that not all emerging markets have experienced these inflationary pressures at the same pace. Home to much of the world’s natural resources, many large emerging economies have for example benefitted from domestic energy supply in the form of coal or gas.
Perhaps most importantly, emerging markets continue to offer growth opportunities at a time when global growth is muted. In aggregate, emerging markets tend to grow faster, but there are specific areas of rapid change and innovation. In banking, for example, there are still vast under-banked populations. This has been a fertile backdrop for the group of fintech. Innovative businesses are rolling out platforms that offer banking, insurance or brokerage services. This type of growth runway is hard to find in saturated developed markets.
We also see a number of emerging markets placing significant emphasis on education, particularly technical education. With expertise in programming and software development, these countries are in the vanguard of digitisation. Global businesses can access these skills at lower cost, because the cost of living remains lower in many emerging markets, but it is also a source of considerable innovation within emerging markets themselves.
Equally, while some emerging markets remain dependent on the global consumer as a market for their products, a number of countries are now seeing sufficiently rapid growth to sustain a high level of local demand for banking services, consumer goods or online platforms (gaming, ecommerce). We see a virtuous circle in many emerging markets, where strong commodity prices bolster the economy, which ripples through to entrepreneurship and higher levels of education. In the short-term, this helps shield them, to some extent, from the problems of the global economy and in the longer-term, it helps create self-sustaining growth.
These advantages are helping emerging market companies offset some of the pressures emerging from the global economy. However, this is still a complex environment, and, on the Fidelity Emerging Markets Ltd Investment Company, we strive to ensure the companies in which we invest have sound defences against rising costs, whether than is strong market share, a large addressable market for their goods, significant pricing power or strength of brand.
It is important not to ignore the environment in which a company operates. Banks, for example, have local dynamics. They will be affected by local monetary policy and regulation and are often a proxy for the health of an individual economy. As such, our banking exposure is focused on countries such as Brazil, which has been proactive in hiking interest rates and where the central bank is robust and independent, over countries such as Turkey, where the central bank is in thrall to the government and the economy is collapsing.
Sentiment continues to be a significant problem for emerging markets, and we have seen the gap between share price performance and operational performance grow wider and wider. It is typical of this type of environment, but it should not blind investors to the merits of emerging markets. We believe they may emerge stronger and more resilient after this bout of volatility has ebbed.
The value of investments can go down as well as up and investors may not get back the amount invested. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. The use of financial derivative instruments for investment purposes, may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. This Investment Company invests in emerging markets which can be more volatile than other more developed markets. Investors should note that the views expressed may no longer be current and may have already been acted upon. The shares in investment trusts are listed on the London Stock Exchange and their price is affected by supply and demand. Investment trusts can gain additional exposure to the market, known as gearing, potentially increasing volatility. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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Fidelity Emerging Markets Ltd (LON:FEML) investment objective is to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to Emerging Market companies, both listed and unlisted.