Emerging markets trusts shine, but will it last?

Read Matthew QuotedData

After a tricky start to the year, one of the best-performing investment company sectors in recent months has been emerging markets. In share price terms, some global emerging markets trusts are up as much as 30 per cent over the past three months. So what has been driving this change of fortune?

Latin America’s rebound is in part down to politics, as investors get excited about the prospect of a new government in Brazil. But the main reason why emerging markets were out of favour in the first place was the slowdown in China’s economic growth.

China is responsible for much of the demand for the commodities produced by many emerging markets, and slower demand translated into collapsing prices for many commodities. Even signs of life in the Chinese economy have been seized upon by investors. The price of iron ore has soared and share prices of mining companies focused on the area have responded accordingly.

Funds focused on the area have topped our tables of best-performing investment companies over the past couple of months. These include mainstream funds such as BlackRock World Mining and more esoteric funds such as Golden Prospect Precious Metals.

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It is hard to tell yet whether the recovery in commodity prices will be sustained. Some production capacity has come out of the system but the real need is for a resumption of Chinese demand – time will tell.

Fidelity Asian Values’ small cap and value-focused style has prospered despite difficult Asian markets. Performance has been helped by being underweight China, overweight India and having exposure to some relatively defensive sectors such as tobacco. Manager Nitin Bajaj thinks stocks are, on average, still attractively valued.

An out-and-out Asian growth fund such as Pacific Horizon, which has significant exposure to technology and biotech stocks, is struggling to shine. Manager Ewan Markson-Brown believes investors are not willing to ascribe full value to the future growth potential of a company in this market. At the same time he reckons many Asian companies are developing and exploiting cutting-edge technology and, unburdened by legacy infrastructure, can often deploy new technology much faster than they could in more developed economies. An example of this could be the growth of mobile commerce in many parts of Asia over traditional banking.

Edinburgh Dragon’s performance has perked up slightly over recent weeks relative to its peer group, but manager Adrian Lim is concerned that all the artificial stimulus and interference in the Asian and world economy is distorting markets, which are not discriminating enough between good and bad companies.

Latin America’s prospects depend on how the political scene unfolds. The rally in commodities could falter but, if it takes hold, could be significant. Asian stocks might on the whole be attractively valued but a choice between defensive, growth and quality styles is a hard call right now.

Matthew Read is senior analyst at QuotedData