Extract from the Edison Report
The analyst’s view
Emerging markets have multiple drivers supporting long-term earnings growth, including consumer under-penetration and exposure to growth themes such as increased digitisation. Dividends are an increasingly important feature in emerging markets, having generated c 3% of the average c 9% annual total returns for investors based on long-term average rolling five-year returns (source: TEMIT). Ness reports that 20% of the trust’s portfolio has a dividend yield above 5%.
Investor risk aversion evident in lower valuation
Investment trust discounts have generally widened this year in an environment of increased risk aversion. TEMIT is no exception as its 13.1% share price discount to cum-income NAV is wider than the 11.0% to 12.2% range of average discounts over the last one, three, five and 10 years. Given the positive relative growth prospects and attractive valuations of emerging compared with developed markets, global investors may benefit from an allocation to a large, well-established emerging market fund that has a clearly defined philosophy and investment approach, especially when investors return to focusing on companies with favourable fundamentals rather than trying to anticipate macroeconomic developments.
The manager’s view: Tough macroeconomic backdrop
The fund managers: Chetan Sehgal and Andrew Ness
Ness comments that global markets have been ‘challenging’ this year; for the first nine months of 2022, the MSCI World Index declined by 25.4% and the MSCI Emerging Markets Index by 27.2% (both in US dollar terms). According to the manager, the macroeconomic backdrop is not being helped by the ongoing war in Ukraine. Higher inflation and a strong US dollar are leading to interest rate hikes in developed markets, the magnitude and timing of which have not been seen in many years. While COVID-19 no longer dominates the headlines, Ness is nervous about the potential for a bad UK flu season, while China’s zero-COVID-19 policy is weighing on its economic activity. The manager also points to the global climate crisis, including the devastating floods in Pakistan, commenting that the world is changing and the need to transition away from fossil fuels will bring costs and burdens for companies and consumers, which is a headwind to economic growth.
However, Ness is relatively upbeat about the prospects for emerging economies, which he considers to be more resilient due to an improved policy environment. Despite this, the manager says that emerging market equities is an asset class that is ‘unloved, under-owned, undervalued and underappreciated’