Page 10 - DIY Investor Magazine | Issue 34

TAKING STOCK IN A VOLATILE MARKET
Amid continued volatility across emerging markets, Fidelity Emerging Markets Limited portfolio manager Nick Price takes stock of recent developments and shares his latest views. With the prolonged war in Ukraine and China’s zero Covid policy weighing on investor sentiment, he provides an update on the portfolio and positioning amid continued uncertainty.
It has been a challenging year for emerging markets with the protracted war in Ukraine, Covid-19 related lockdowns in China, a stronger US dollar and expectations of more aggressive interest rate rises as central banks grapple with inflation and consumers face the rising cost of living.
The positioning in Russia had played a critical role in providing high dividends and commodity related exposure (directly and indirectly); these were important portfolio attributes which had served to counteract some of the headwinds before the war broke out.
Uncertain times have given rise to some extreme market moves. As Russia became un-investible, market participants redirected their attention to other commodity rich nations across the Middle East and Latin America to fill the gap.
The market has been led by news flow and changing sentiment. However, despite the current volatility, we believe that fundamentals will return to the fore as the unprecedented fiscal and monetary policy support begins to fade. Certainly, meaningful value has emerged as stocks have de-rated significantly and the overall discount to developed markets is wide.
PORTFOLIO POSITIONING
While the outlook is uncertain, we acknowledge that value stocks may continue to perform particularly well, therefore, as quality managers we are giving careful thought to portfolio composition. This year has bought about a remarkable change in our investible universe, requiring us to consider how best
to recalibrate parts of the portfolio given Russia’s effective exclusion from the universe.
‘MEANINGFUL VALUE HAS EMERGED AS STOCKS HAVE DE- RATED SIGNIFICANTLY’
We have been seeking new opportunities in areas such as Brazil and the Middle East, spending time on the ground to meet with companies to enable us to make changes on a highly selective basis.
Our continued focus remains on owning well-capitalised businesses with under-levered balance sheets. Amongst the more recent additions to the portfolio are a series of relatively small positions, added on a highly selective, bottom-up basis, reflecting a move to rebalance the portfolio by adding value stocks, with quality characteristics.
‘FOCUS REMAINS ON OWNING WELL-CAPITALISED BUSINESSES WITH UNDER-LEVERED BALANCE SHEETS’
We have raised exposure to Brazilian financials in both exchanges and the banking sector and have initiated new positions in Middle East. Dubai Electricity & Water Authority offers attractive dividend yield and has a favourable regulatory backdrop. It should also benefit from volume growth.
Meanwhile, the Chinese market is directionally looking more positive, with cheaper valuations, a more positive tone on platform regulations and possible stimulus measures given the rising unemployment rate. As a result, we are turning selectively optimistic on the China internet and property sectors but remain cautious on areas where the rising cost of living may dampen demand for consumer goods such as sportswear and auto’s.
We have sought to capitalise on particularly attractive valuations across a series of markets, making the most of the portfolio’s unconstrained, all cap approach which encapsulates frontier markets. The enhanced investment powers of the investment company allow us significant flexibility to take full advantage of a sizeable investible universe and to capitalise on the fantastic breadth of analyst coverage at Fidelity, with some 50 focused on emerging stocks.
DIY Investor Magazine · July 2022 10