While the developed world’s stockmarkets have been getting excited about prospects for a post-Covid-19 world, emerging-market stocks have rebounded too in recent weeks. The benchmark MSCI Emerging Markets (EM)Index has gained 8% so far this month; India and Brazil have climbed by 7% and 16% respectively.
Countries such as India, Brazil, Turkey and South Africa might now benefit from a series of tailwinds. Their Covid-19 infection rates – even without a vaccine – are already declining, which leaves their economies in better shape to expand as the developing world also stabilises. Many local stockmarkets are also cheap (especially Russia and Brazil in relative terms)and may be direct beneficiaries of a sudden turnaround in commodity prices.
A skew towards east Asia
Prospects are thus beginning to look a tad brighter for emerging markets. However, investors in this broad global sector need to keep in mind its skew towards east Asia.Three Asian countries – China, Taiwan and South Korea – now dominate the MSCI EM index, comprising over two-thirds of its value. These three economies are closely intertwined, with a strong technology bias. All three have also weathered the Covid-19 pandemic well. Traditionally important countries such as India – worth 8.15% of the index – and Brazil, just 4.39%, have almost become afterthoughts.
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This focus on the three Asian economies can be seen in leading actively-managed funds such as the long-running (and outperforming) JPMorgan Emerging Markets Investment Trust (LSE: JMG). It is currently weighted towards China, which comprises 33% of the portfolio (it is underweight the benchmark index); Taiwan makes up 22.9%, (overweight); and South Korea 6.4% (overweight). Add these three up and we’re not far off that two-thirds level. The managers are overweight Russia and Mexico, however.
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Now consider two other less established but equally high- performing global emerging-markets funds and we see a radical divergence. The Mobius Investment Trust (LSE: MMIT), which is trading at a 5.7% discount to its net asset value (NAV), has its biggest holdings in India (24.3% of the portfolio) and Brazil (14.6%). The three Asian economies represent only 35% of the fund. Turkey, meanwhile, is clearly overweight in this fund. It’s a similar story at the Fundsmith Emerging Equities Trust (LSE: FEET), trading at a 6.7% discount. Here India accounts for 43.5% of the portfolio – interestingly, Vietnam is overweight too, at 2.9% of the fund.
We might begin to see some of these emerging markets outperform as the global economic cycle picks up ; by contrast many investors worry that the China-dominated east Asian region might already have seen its best gains.
Investing in different national and regional economies forces you to examine the record and holdings of investment trusts in this space. I have compiled what I call my “emerging markets A-list”. It’s a collection of London-listed investment trusts boasting a solid record of beating their respective benchmarks over many years. It also gives you a wider range of country- specific funds to focus on. In my view investors might wish to consider a diverse handful of key countries (and regions) as we move into 2021. Top of that list would be India, which despite government mishaps is now well placed to race out of the coronavirus disaster in 2021. Indian stocks typically command high valuations and are quite volatile, so they benefit disproportionately from a resurgence in confidence in emerging markets. Top of my list here would be the Ashoka India Equity Investment Trust (LSE: AIE), another relatively new fund that has proved its mettle in recent months.
A runner up would be the India Capital Growth Fund (LSE: IGC), which has had a tough few years owing to some poor stock selection. However, it is now in better shape and concentrating more on mid-caps.
I also think that Russia could be a relative star in 2021 (though I also thought that in 2020, wrongly) largely because its government has more financial firepower to spur growth, especially if energy prices start to tick up. Yields of more than 5% are worth grabbing too. JPMorgan Russian Securities (LSE: JRS) may thus be worth a look.
Sticking with the theme of economies with upside potential from a rise in energy prices, there is also the Gulf Investment Fund (LSE: GIF), which invests in countries such as Qatar, the UAE and Saudi Arabia. Valuations – as in Russia – are cheap and the fund trades on a 8.5% discount (and yields 2.3%).
A market for the brave
The real wild card is Turkey, where local stocks – and the currency, the lira – have plummeted owing to a long list of worries, not least an impetuous populist leader determined to pick fights with everyone and whose mismanagement of the economy in recent years is almost legendary. But in recent weeks, there have been signs that President Erdogan realises he needs to be more realistic and reshape economic policy. You cannot buy a Turkish trust, which means you can only make this bet with the iShares MSCI Turkey UCITS exchange-traded fund (LSE: ITKY). If Turkey does turn around, this fund is ideally positioned.
