Analysts flag ‘cheap’ EM trust opportunities

Analysts flag ‘cheap’ EM trust opportunities

Widening discounts on emerging market investment trusts present a buying opportunity for budding investors in the region, analysts have claimed.

The rally enjoyed by emerging market stocks in recent weeks has not yet been reflected in trust discounts. The MSCI Emerging Markets index has risen by 22 per cent since the lows of January 21, but the weighted average discount in the AIC Global Emerging Markets sector has widened from 9.9 per cent to 11.9 per cent over the same time period.

This widening is in keeping with the trend seen across most investment trust sectors in recent weeks, though some EM vehicles have begun to see a slight tightening of their discounts over the past month. But discrepancies remain.

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Stephen Peters, an investment analyst at Charles Stanley, noted discounts “haven’t really moved” in the last six months despite strong performances from offerings such as the Templeton EM trust.

According to FE Analytics the £1.4bn vehicle has returned 12.5 per cent over six months, compared with 5.7 per cent from its AIC peer group.

“The interesting thing is the short-term performance of the Templeton trust, which isn’t reflected in its discount,” said Mr Peters.

But after several false dawns for the asset class, most analysts call for prudence. Canaccord Genuity’s Alan Brierley said he would favour a “nibble” at emerging market investment trusts, but only on a five or 10-year view.

Simon Elliott, head of research at Winterflood Securities, said: “Emerging markets do offer a value opportunity and they have offered a relative value opportunity for some time.”

“It’s a more difficult time for emerging markets for lots of good reasons. One suspects that at some point they will bounce back. You have to be a bit of a contrarian investor to get into emerging markets but if you are of that bent, investment trusts are a good way to do it. Once NAV performance picks up, discounts do tend to narrow and investors will get a double whammy.”

Mr Peters warned investors not to obsess over discounts alone. “I wouldn’t get too hung up on discounts – emerging market returns will be driven by NAVs, which will be influenced by currencies, domestic and local, and improving earnings and corporate governance trends in the countries,” he said.

“I’m hearing few managers begin to get particularly interested in emerging markets who invest globally, aside from some of the most dyed-in-the-wool value investors.”

Charles Murphy, investment funds analyst for Panmure Gordon, struck a similar tone.

“We have seen discounts widen across the board with trusts’ share prices failing to keep up with NAVs,” he said.

“I am always cautious about saying buy or sell on just the discount, but if you are looking for emerging market exposure, the trusts offer relative value versus open-ended funds.

“They do represent an opportunity, especially because they are non-sterling assets, but the way I would frame it is that if you are looking for emerging markets, then they are a cheap way in. The discounts available shouldn’t drive the investment.”