Ian Cowie explores emerging markets and finds some reasons to be cheerful.
Economic and political turbulence have shocked stock markets recently and prompted critics to claim Britain “is behaving like an emerging market”. Larry Summers, a former United States treasury secretary, was using the phrase pejoratively but shareholders in some investment companies may wish it were literally true.
The explanation is that, despite many folks’ prejudices to the contrary, several emerging markets investment companies - including some in which I am a shareholder - have done much better than their United Kingdom counterparts this year. So, as the days get darker and colder closer to home, it might cheer us up to consider sunnier and warmer parts of the world - and their often undervalued economic opportunities.
Most topically, take Brazil, which re-elected the left-wing former convict Luiz Inácio Lula da Silva as president earlier this month. While that may confirm some people’s fears about the political risks present in developing economies, stock market valuations suggest others are more focussed on how Latin America might benefit from rising demand for soft and hard commodities, such as coffee and copper.
Brazil is the largest geographical exposure of BlackRock Latin American (stock market ticker: BRLA), accounting for 65.5% of its portfolio. While the average UK All Companies investment company has suffered a total loss of 25% over the last year and remains marginally down over the last five years, BRLA has delivered positive total returns of 36% and 13% over the same periods, according to independent statisticians Morningstar.
So much for City cynics’ jibe that Brazil is the country of tomorrow - and always will be. To be fair, this long-term BRLA shareholder knows from painful experience how volatile these shares can be but its dividend yield of 4.9% pays investors to be patient.
Better still, its income distributions have risen by an annual average of more than 10.9% over the last five years. It is important to beware that dividends can be cut or cancelled without notice.
However, if this historic rate of increase is sustained, it would double shareholders’ income in just over six and a half years. Nor am I necessarily telling you about this too late because BRLA continues to be priced at a 16% discount to its net asset value (NAV).
Closer to home, Britain’s third prime minister in two months, Rishi Sunak, is also our first Hindu leader, whose family hail from India. That also happens to be where an investment company provided this small shareholder with his first ‘ten-bagger’ or a share whose prices soared 10 times in value.
I paid 63p in June, 1996, for stock in what is now listed as JPMorgan Indian (JII) and currently costs 842p. More recently, I added exposure to the sub-continent via the medium and smaller companies specialist India Capital Growth (IGC).
While JII delivered positive total returns of 2.2% and 7.3% over the difficult last year and five year periods - and IGC achieved 6.5% and 27% - they remain priced at discounts to NAV of 22% and 9.4% respectively. Neither pays any income.
Like India, Vietnam is benefiting from multinational companies diversifying their supply chains away from China amid rising tensions between the latter and America. For example, the technology giant Apple (APPL) is transferring the production of some iPhones from China to India and Vietnam.
This trend helped Vietnam Enterprise Investments (VEIL) deliver total positive returns of 40% over the last five years, although that slumped to a negative loss of 25% over the last year. I first paid 404p in July, 2018, for VEIL shares that currently cost 560p but remained dissatisfied with its absence of dividends.
So, last month, I transferred this holding to VinaCapital Vietnam Opportunity (VOF) which yields 3.1% income that has risen by an annual average of 12.9% over the last five years. VOF’s total returns over five and one-year periods are a positive 60% and negative 14%. Meanwhile, VEIL and VOF both remain priced at double-digit discounts of 14% and 18% respectively.
It is important to remember that past performance is not necessarily a guide to the future. While several emerging markets investment companies have delivered greater total returns than the UK All Companies’ average recently, there is no guarantee that this will continue.
However, one fundamental attraction of investment companies is that they do enable individual investors to obtain exposure to economies that offer diversification from our domestic market. On a purely practical level, investment companies also enable investors of all sizes to share the cost of professional asset allocation in markets which have different languages, legal and tax systems and trade while we are asleep.
To return to where we began, political shocks in Westminster have been a bit of a nightmare for some British investors recently. While we can all dream of happier days ahead, it makes sense to set aside outdated prejudices about emerging markets and consider the opportunities they offer to diminish risk by diversification.
