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Investors’ focus has been directed towards China as its weight in global indices grows, however, this may see them miss out on the growth, income, and diversification opportunities that smaller emerging markets still offer says Emily Fletcher, Co-Manager of the BlackRock Frontiers Investment Trust plc.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
At a time of global fragility, investors cannot neglect diversification. Yet many emerging market portfolios are focused on a few dominant countries and stocks that are equally sensitive to global tensions and news flow. With imbalances at both the country and stock level - Chinese technology giant Alibaba, for example, holds a similar share of the index compared to the whole of Latin America, while Tencent is worth more than Eastern Europe[1] - we believe investors may be missing out on opportunities offered from smaller markets such as Indonesia, Turkey, and Egypt as economic conditions change.
While external pressures remain from the unknown impact of COVID-19 and flaring geopolitical tensions between the US and China, it is our belief that the breadth and diversity across the smaller markets will allow us to find additional pockets of value in such a fluid and macro-sensitive environment. This also comes at a time when low interest rates and coordinated fiscal stimulus has greatly improved liquidity, a factor that should benefit all developing markets as investors hunt abroad for returns and yield.
With the promise of broader access and valuations that compare favourably to long-term averages, we believe frontiers may be on the cusp of better times after a period when global investors have pulled money from the asset class.
Improving fortunes
On the BlackRock Frontiers Investment Trust, we aim to identify those markets that are at the foothills of a change in fortunes. When it happens, it can be powerful: investors reap the benefits of an improving currency, stronger liquidity and a change in investor expectations. This means we may be looking at countries where bond yields are high, the currency is weak and GDP is lower, but they are showing stronger signs: liquidity may be improving, trade balances are healing and the political situation may be stabilising.
That said, while we are always looking to invest in countries where the backdrop is improving, we aim to add around two-thirds of our value from picking individual stocks. In other words, strong companies in improving economies. At times when the economy is improving, stronger companies will see an influx of capital and can employ that additional capex to their advantage.
While not an explicit objective of the Trust, investing across the smaller economies allows us to engage with regulators and policy makers, passing on investment expertise that can help drive change to develop a more sustainable financial and social infrastructure for those communities to thrive.
Natural diversification
These markets have a notable diversification advantage. They are very different both to broader global stock markets and from each other. What is happening in Vietnam, is very different to what is happening in Nigeria, and then again to South Africa. From a risk management perspective, this is helpful.
The coronavirus has demonstrated how correlation can increase at times of market dislocation and therefore the importance of true diversification. We have 16 to 17 different countries represented within the portfolio, each with different drivers of performance and growth.
Risk: Diversification and asset allocation may not fully protect you from market risk.
Income advantage
We find that the companies we invest in not only tend to generate cash, but also prioritise paying dividends, which directly benefits shareholders. Also, valuations remain quite depressed, flattering these payouts. While these markets haven’t fully escaped dividend cuts in the wake of the coronavirus crisis, they haven’t been as hard-hit.
What will change the fortunes for these markets? It may be more confidence in global stock markets or global growth, it may simply be that investors realise that they have become too cheap given the value on offer. Either way, we believe we are on the cusp of change.
Risk: Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. Unless otherwise stated all data is sourced from BlackRock as at July 2020.
For more information on this Trust and how to access the potential opportunities presented by frontier markets, please visit: www.blackrock.com/uk/brfi
Risk Warnings
Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
Trust Specific Risks
Exchange rate risk: The return of your investment may increase or decrease as a result of currency fluctuations.
Emerging Europe risk: Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore, the value of these investments may be unpredictable and subject to greater variation.
Frontiers risk: The Company invests in a number of developing emerging markets (“Frontier Markets”). Frontier Markets tend to be more volatile than more established markets and therefore present a higher degree of risk as they are less well regulated and may be affected by political and social instability and other factors.
Gearing risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
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Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance.
The BlackRock Frontiers Investment Trust plc currently conducts its affairs so that its securities can be recommended by IFAs to ordinary retail investors in accordance with the Financial Conduct Authority’s rules in relation to non-mainstream investment products and intends to continue to do so for the foreseeable future. The securities are excluded from the Financial Conduct Authority’s restrictions which apply to non-mainstream investment products because they are shares in an investment trust.
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[1] MSCI, June 2020
