Fidelity Emerging Markets Ltd on Thursday noted signs of ‘a very strong US economy’ but reported a decline in net asset value due to China underperforming.
The investment fund focused on high-growth emerging markets within Africa, South Asia, Latin America, and Europe said net asset value per participating preference share edged down 3.2% to $9.77 as at December 31, from $10.09 at June 30.
NAV total return was minus 0.3% in the six months to December 31, underperforming against its benchmark, the MSCI Emerging Markets total return index, which had a return of 1.0%.
Fidelity Emerging said China was the largest driver of underperformance, as the underweight exposure to mainland China detracted after the September stimulus announcement prompted a stock market rally.
Further, the company’s exposure to Brazil detracted amid concerns about the country’s fiscal deficit and rising interest rates, which weighed on performance.
India was a key driver of performance, the company said.
Fidelity Emerging’s top contributor was Gurugram, India-based online travel agent MakeMyTrip. The company ‘has a significant growth runway ahead of it over the next decade as the penetration of online travel and hotel spending increases. While valuations are relatively high, they are more reasonable than that of consumer peers in India given its superior growth trajectory. Given the strong share price performance we took profit in the stock at year end. Several short positions in Indian businesses also contributed as overvalued small caps corrected at the end of the year,’ Fidelity Emerging said.
The company detracted positioning in Kazakhstan.
Fidelity Emerging’s top detractor was Almaty, Kazakhstan-based ecommerce and payments platform Kaspi.KZ, which was impacted by local currency weakness.
More positively, ‘Fundamentals for Kaspi.KZ remain robust, and the company announced the acquisition of Turkish ecommerce business Hepsiburada later in the year, which should expand its addressable market. The bank that we have a short position in rallied despite continuing to exhibit weak fundamentals, a performance trajectory we expect to reverse over time.’
The company said that emerging markets are ‘well placed,’ while signs on a very strong US economy may sustain the dollar strength experienced in 2024. While noting that China is an ‘important part of the puzzle,’ it added: ‘Artificial intelligence may start playing a deflationary role, while any resolution of the Ukraine war could see energy prices fall. Emerging markets are in general far better placed to deal with these higher rates than Europe given the broadly better fiscal backdrop.’
Chair Heather Manners said: ‘While at the time of writing, the imposition or increase of US tariffs on cross-border trade is dominating the news agenda, there are reasons to believe that the year ahead may see a continuation of the recovery in emerging markets. As your portfolio managers, Nick Price and Chris Tennant, point out in their review of the period, valuations across their investment universe are at multi-decade lows relative to developed markets, and particularly relative to the US.
‘Many EM economies remain robust, having avoided the fiscal excesses of the West in response to the Covid-19 pandemic, with monetary policy headroom and less dollar-denominated debt than has historically been the case, which will be beneficial if the domestic inflationary effects of President Trump‘s trade tariffs cause US interest rates to remain higher for longer. Meanwhile, there is considerable strength in EM companies’ balance sheets, and many are returning capital to shareholders.’
Fidelity Emerging shares were 1.1% lower at 688.30 pence each on Thursday morning in London.
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