By Catherine Lafferty Discounts on emerging market funds are likely to narrow in 2001 as investors t...
By Catherine Lafferty
Discounts on emerging market funds are likely to narrow in 2001 as investors turn more positive on the region, according to Merrill Lynch.
While investor sentiment to emerging markets is currently weak, there is a slowing global economy and continued volatility in the markets, much of this has been priced in already, according to Charles Cade, investment trust analyst at Merrill Lynch.
Cade said increasingly fund managers are turning more positive on emerging markets with relative NAV performance looking good in recent months.
He said: "If markets do rally, we believe discounts of emerging market funds could narrow sharply, particularly among the better performing Asian trusts."
Merrill Lynch believes there remains value in the sector for investors taking a medium term view.
In particular, Cade recommends Templeton Emerging Markets because of its liquidity and good long-term track record. The trust was trading on a 20.4% discount to NAV as of 3 January, and has returned -18.3% for the year ending 13 December. In 2000, the MSCI Emerging Markets Free index fell some 26.21%, in sterling terms.
Merrills also thinks that F&C Emerging Markets has achieved decent performance since its change in management and investment style at the start of 1999. Over the year to 13 December the trust has returned -13.7%, ranking it eight out of 11 trusts in the global emerging markets sector. Merrill Lynch believes the trust offers well managed, risk controlled exposure to emerging markets and could accomplish solid out-performance in the medium term.
Some investment trusts are facing corporate activity in the near future, Cade said, among them, Beta Global, for which liquidation has been proposed, Govett Emerging Markets, for which a cash exit is to be offered in mid 2001 and Murray Emerging Economies, which will have a continuation vote in February.
Beta Global is still trading on a discount although the trust is the only one in the global emerging markets sector, which posted positive returns for the year ending 13 December. The trust returned 14.5% compared to the sector average returns of -7.9%. Cade said the discount, which on 3 January stood at 13.9% to NAV, reflects the characteristics of the portfolio, which has a notable weighting in illiquid stocks in frontier markets.
Over the past year Latin American closed end funds have mainly performed in line with emerging markets, although a narrowing of discounts related to corporate activity has led to outperformance in price terms, according to Cade.
Merrill Lynch's recommended trust for the region remains F&C Latin American, although Cade notes that its aggressive investment approach has seen underperformance in recent months. The trust returned -17.7% over the three months to 13 December. The emerging Europe universe is small, including just two funds, Eastern European Trust and Baring Emerging Europe, neither of which invest in Greece or Turkey, which account for around half the MSCI Emerging Europe Index.
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