After strong gains in 2016 and 2017, emerging market equities are once again falling out of favour with investors. For several weeks now, investors have been pulling out billions of dollars from emerging markets, amid growing fears of a US-China trade war and the rising pressure from the dollar and higher bond yields.
However, some investors may see this as a contrarian opportunity to buy into weakness. Certainly, the escalating trade tensions and political instability should be taken seriously, but the sell-off in emerging markets may have been overdone. Some analysts reckon valuations have already adjusted sufficiently to compensate for the increased risks, while the longer-term outlook for emerging markets remains fundamentally attractive.
Discount to NAV
What’s more, there are a number of emerging market-focused investment trusts which continue to trade at a significant discount to their net asset values (NAVs), giving investors the opportunity to pick up shares in such funds for a price which is significantly below the value of their underlying investments.
One fund with a particularly wide discount to its NAV is the Templeton Emerging Markets Investment Trust (LSE: TEM). With a discount of just over 15%, the fund is trading at its widest discount to its NAV for nearly two years.
Aside from the recent sell-off in emerging markets, another cause for its widening discount may be the recent change in its fund manager. Veteran fund manager Mark Mobius, who had been at the helm of the fund for 26 years, retired earlier this year, and was replaced by Chetan Sehgal.
In terms of allocation, the fund tilts towards countries such as China, South Korea, Brazil and Russia. Sector-wise, the trust is noticeably overweight towards consumer discretionary stocks, which account for 19.3% of its total assets, compared to just 9.5% of the benchmark MSCI Emerging Markets Index.
The consumer discretionary sector has been a persistent favourite for the fund, and is an area which seems best placed to benefit from domestic consumption growth in emerging markets. The consumption theme goes beyond goods and also include services, which are coming to represent a greater proportion of the emerging market economy. Demonstrating this, it has substantial exposure to the Chinese IT sector, via stakes in Naspers (6.1%), Alibaba (4.4%) and Tencent (3.2%).
Despite the recent rout in emerging markets, frontier-markets funds have remained popular. Such funds invest in smaller countries which are at an earlier stage of economic or political development than many larger emerging markets.
Frontier-markets funds haven’t quite entered into the mainstream, and there aren’t very many of them of them on the market — with a demand-supply imbalance, many investment trusts in this space trade at a modest premium.
One such fund is the BlackRock Frontiers Investment Trust (LSE: BRFI), which currently trades at a 4% premium to its NAV. Launched only back in 2010, the fund has realised impressive returns during its short life. Over the past five years, shares in the trust have delivered a cumulative return of 72% — nearly double the performance of its benchmark MSCI Frontier Markets Index, which gained only 39%.
Its most recent performance has been less remarkable, however. Shares in the fund are down 6% year-to-date, following a sell-off in Argentina, its biggest country exposure, and a general shift in sentiment away from riskier assets.