# Exploring Fidelity Emerging Markets investment strategy and opportunities (LON:FEML)

- Link: https://www.directorstalkinterviews.com/exploring-fidelity-emerging-markets-investment-strategy-and-opportunities-lonfeml/4121170961
- Published: 2024-09-09T11:48:34+01:00
- Author: Amilia Stone

**[Fidelity Emerging Markets Limited](https://www.directorstalkinterviews.com/company/fidelity-emerging-markets-limited/feml.l)****(
[LON:FEML](https://www.directorstalkinterviews.com/company/fidelity-emerging-markets-limited/feml.l))**
is the topic of conversation when **Kepler Partners’** Investment Trust Research
Analyst Josef Licsauer caught up with DirectorsTalk for an exclusive interview.

**Q1: Josef, could you just tell us what FEML’s investment strategy is and how it
differentiates from other emerging market trusts?**

**A1**: Nick Price and Chris Tennant are the current managers of Fidelity Emerging
Markets and they’re both very seasoned emerging market investors.

What they aim to do is employ a very flexible strategy, go anywhere mandate within
emerging markets and by that, they seek out both on and off benchmark opportunities
across each sector, the market cap, the geography, including those frontier markets.

On top of that, they can also use derivatives and that most importantly is to take
up short positions in companies within their remit. I think this is where we see
the trust standing out most amongst its peers. It’s through its flexibility to take
out both short and long positions.

So, to quickly cover the heart of the proposition, which is the long book as they
refer to it, they focus their efforts there on identifying those high quality companies.
By high quality, in this case, they want businesses offering consistent returns 
and attractive valuations. They want to own those businesses that are quite dominant
in their respective industries, but also those that have strong franchises that 
they feel will help them capitalise on those structural trends that they see in 
developing markets over time.

On the short book, this includes companies that are the complete mirror opposite
to those that they’re looking for in the long book. So, they actively target those
that have significant downside potential driven by stress and poor balance sheets.
They want very weak management teams, they want structural weaknesses within industries
or business models. That’s their bag on the short side. While active positions in
the short book cannot be disclosed, we can certainly talk to some of the closed 
positions they’ve had.

One of the most recent examples that we have available is a company called Microvast,
which is a US-listed battery company with operations in China. The managers here
were drawn to the fact that the company’s battery technology capabilities weren’t
strong and they observed that its balance sheet was far too stressed, really poorly
structured and had a lot of debt on it. That inability to refinance or pay off the
debt ultimately led to a drop in its share price, which is validating the manager’s
strategy on the short book.

I think this is particularly valuable in the current environment we’re in with rates
being as high as they are, albeit coming down in certain parts of the market, it
will lead to higher debt costs and that will put pressure on those weak companies.

So, being able to exploit those vulnerabilities gives them all that chance to generate
differentiated sources of alpha, without having to rely too much on market direction
for returns, ultimately.

**Q2: Where do they view the current opportunities in emerging markets? Are macro
and geopolitical factors influencing the emerging market opportunity set?**

**A2**: Yes, it’s a good one, because both the managers are cognisant of the factors
you just mentioned there, and I think would naturally agree they have influenced
opportunity sets.

For them, most importantly, it’s looking at stock selection from the bottom up. 
So, those individual company potentials, rather than a top down allocation to different
countries or regions.

Either way, they see opportunities at the moment across emerging markets influenced
by those factors we’ve just noted, but also the structural trends they’re seeing
and the historically low valuations in the market.

One of the areas I’ll draw you to is Poland. The team value on the ground insight,
and they recently went to Poland, it was in April this year, to meet an array of
companies, both existing holdings and new opportunities. They noted the country’s
economy is really, really starting to grow, it’s showing signs of life, and it’s
only making up 1% or so of the emerging markets index.

That to them, opens up a realm of opportunities, because there is less coverage 
there, than perhaps more of the developed markets. So, for active investors, which
both Nick and Chris pride themselves on being, there’s a bit of an informational
edge.

One of the businesses they’ve been able to identify, which has very few analysts
on the sell side covering it, is AutoPartner, and AutoPartner is distributing auto
parts across Poland. It’s been growing steadily over time, building that market 
position and it’s now starting to look forward to expanding into Western Europe.
So, there’s a bit of an opportunity there.

Another couple more areas of interest, which the team were drawing on the last time
we spoke, is the opportunities they’re finding some smaller frontier markets like
Vietnam. In Vietnam, they’re seeing a really, really fast growing economy that not
only benefits from that highly skilled, low cost labour, but is also starting to
see an influx of interest, given the diversification away from China.

A lot of people are looking to move away from China, given the issues that we’ve
seen of late, whether that be geopolitical or just internal issues like the property
market. That is now leading to a bit of a swell in what the managers in the team
are identifying as the near-shoring or the friendshoring trends.

So, on the friend-shoring trends, this is where Vietnam or the likes of Indonesia
comes in. They could be well placed as beneficiaries for companies who still want
to retain their Central Asian presence without relying on China.

On the near-shoring trend, you’ve got countries like Mexico, which the managers 
are finding opportunities which could be set to benefit from the US companies looking
at drawing back their manufacturing capabilities close to home. Again, not really
relying solely on China.

One last thing, the views the team have on interest rates, that was a fairly interesting
one for me, so they have a really diverse allocation to financials in the portfolio.
Naturally, some benefit from higher interest rates, but they anticipate rates coming
down from peaks, particularly in regions like Brazil, fairly quickly. So alongside
those rate beneficiaries, they’ve made sure to invest in companies that aren’t really
rate sensitive, like those in the fintech space, but also those that are actually
going to benefit from rates coming down.

We’ve got a couple of positions, a bank in Hungary, for example, which deals with
liabilities and an exchange in Brazil.

**Q3: Could you talk us through some examples of strong recent stock selections 
from the managers?**

**A3**: So, the last 12 months have been a really strong period and that comes despite
the headwinds that they’ve seen posed by Chinese equities over 2023.

There have been a number of stocks that have driven performance, I’ll probably draw
you to the Kazakhstan’s Kaspi. Kazakhstan is a bit of a frontier market, relatively
undercover, but the managers have drawn on that experience and the large resources
they’ve got available at Fidelity to go to Kazakhstan to find those kind of opportunities.

Kaspi, notably, is the opportunity set for them there and it’s a business that is
growing very, very big in its respective industry and offers e-commerce payments
and fintech services.

The managers noticed its dominance growing and its user base growing, but also its
plans to expand other parts of the business and more recently it’s done so in this
e-grocery business. All of those factors combined has led to it being one of the
top performers over the last 12 months.

Away from the long book, looking at the short book now, the managers have shown 
really, really strong stock selection, particularly over the last 12 months, and
that’s come from two key drivers.

Again, we can’t disclose the active positions, but the managers categorise them 
as a notable contribution from an Asian utility company and an Asian battery maker.
Now, again, they’ve drawn on the resources here to identify specific weaknesses 
in each business and on the former, so the utility company, they noted that it was
trying to pivot into an unrelated market that it didn’t really have great deal of
experience in. So again, an example of poor management. The Asian battery maker,
so the latter example, was suffering from a bit of an oversupply issue so they’ve
identified a structural weakness in the industry.

Both of those companies’ share prices have been hit pretty hard so again, it validates
not only the effectiveness of being able to use short positions, but also their 
stock selection strength within it.

**Q4: What opportunity does Fidelity Emerging Markets’ current discount present 
to investors?**

**A4**: I think if we look at FEML’s discount over the last five years, it paints
quite an interesting picture.

From the late 2021 to 2023, it was trading fairly consistently in mid-teens. And
it peaked in March 2022, around 18/18.5%, and based on the data that we have, that
was quite an unusually high level relative to its history, at least. It can be explained
from the issues that it’s had over 2022, from the fallout of the invasion of Ukraine
by Russia, and also reflecting the trend of the general widening of discounts in
the sector.

Since then, the discount has narrowed materially, and it’s now back down towards
its five-year average, and yet we think, despite it coming down towards its five-
year average, it still offers that potentially attractive entry point for investors,
particularly those long-term investors looking for, and the key word here is, differentiated
exposure to emerging markets.

The trust is backed by two very experienced managers, with one of the largest team
of analysts in the EM space. It also benefits from that ability to use both short
and long positions, which again, as we mentioned earlier, is helping reduce that
reliance on market direction driving returns. What we haven’t mentioned it’s also
supported by a very, very active Board. The Board last year announced a pretty robust
share buyback programme, and so far, this year completed a tender offer. So again,
they’re showcasing their commitment to narrow that discount down over time in a 
sustainable way.

All in all, we think that FEML presents a highly differentiated proposition for 
investors, and if its performance continues as is, we think that it’s trading at
a potentially attractive discount level.

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