Investment trust insider on emerging markets – James Carthew: Who to back in the emerging markets rally?
The good news that we have had over the past few weeks on the US election and vaccines to tackle Covid-19 have helped drive a recovery in emerging markets investment trusts. Shares in JPMorgan Emerging Markets (JMG), Mobius (MMIT) and Aberdeen Emerging Markets (AEMC) are now up by more than 35% over the past six months. If you were already investors, this is clearly good news, but if you weren’t, is it too late to join the party?
Taking a slightly longer perspective and looking at one-year returns, some of the trusts in this sector have still lost money in share price terms. There could be some real bargains here. China dominates emerging market indices and its relative success in dealing with the virus means that its stock market is one of the best-performing globally this year. Those funds in the global emerging markets sector that were underweight China for strategic or structural reasons have missed out on this.
The worst-performing fund in the sector over the past year is Barings Emerging EMEA Opportunities (BEMO), which this month changed its name from Baring Emerging Europe (BEE). It has moved across from the emerging Europe sector after broadening its remit to include the Middle East and Africa. BEMO’s poor returns are largely a consequence of its high exposure to Russia, which used to dominate its old universe. However, it has underperformed JPMorgan Russian (JRS) by seven percentage points over the past year so poor stock selection might also have played a part too.
While places such as Latin America and India could see strong recoveries as the impact of Covid fades (and I wouldn’t put you off thinking about the trusts dedicated to those areas), I am not so sure that Russia is a great bet. One of Putin’s many failures is that he has not succeeded in diversifying Russia’s economy away from energy and materials.
Oil and gas prices have risen in the past few weeks but are still well off their levels of this time last year. Biden has already indicated that he will sign the Paris Agreement on climate change soon after taking office. Measures to phase out petrol and diesel powered cars, other than hybrids, may follow. My guess is that sentiment against fossil fuels is only likely to get worse. That won’t help most Middle Eastern markets either.
BEMO is therefore not on my shopping list, despite it trading on one of the widest discounts (16%) in the sector.
Many utilities and infrastructure stocks have done pretty well over the past year, as is evidenced by the strong returns generated by Ecofin Global Utilities and Infrastructure (EGL).
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Apologies but I mixed up Utilico Emerging (UEM) and UIL in this article – it is true that it has done a lot worse than Ecofin but its structure is not the reason.