A ‘Santa rally’ has thus far alluded global markets with nearly all equity markets down over the past month or so as investors continue to worry about the market weakness from China and its effect on the global economy.
The FTSE 100 is trending down from its (partial) recovery from following the Black Monday sell off in August being back down below 6000 points. For the worst effected markets of the year – those in Asia ex Japan and emerging markets – the pain continues.
Performance of index in 2015
Source: FE Analytics
The unclear outlook makes buying back into these markets all the more difficult but also for the contrarian investor more tempting. Therefore, should a recovery occur in global markets for whatever reason there is plenty of ‘value plays’ to choose from in the Asia ex Japan and emerging markets space.
However, buying a particular market via a heavily discounted trust also adds to potential for returns while also adding a layer of protection compared to buying a tracker or equivalent open-ended portfolio.
Here, analysts from Winterflood Securities reveal their three ‘contrarian’ trust picks that they believe could offer the most upside should markets rebound next year.
First up analyst Kieran Drake, analyst at Winterflood tips this £462m trust which invests in the Asia Pacific ex Japan space, a region that has been among the worst performing this year leading to its widest discount for more than five years of 11.03 per cent.
Managed by Adrian Lim since 2013, the fund has lost 12.59 per cent since he took over putting it in the bottom quartile of the IT Asia Pacific excluding Japan Equities sector, according to FE Analytics.
Performance of trust, sector and index under Lim
Source: FE Analytics
Drake said: “Edinburgh Dragon has a good long-term performance record, although it has underperformed in recent difficult market conditions. This is disappointing given Aberdeen Asset Management’s well established investment approach and its emphasis on quality and value.”
“However, it can be almost entirely attributed to the portfolio’s underweight exposure to China and stock selection in the financial sector, where the fund has significant exposure.”
He adds the fund’s portfolio natural bias to “high quality” Asian companies will benefit from the rise of consumption in the region.
The portfolio has its largest overweight position to Hong Kong stocks followed by Singapore and India with little in mainland Chinese shares.
“With China now accounting for around 28 per cent of the benchmark, the fund’s relative performance is likely to be significantly impacted by sentiment towards China.
He adds that with a market capitalisation Edinburgh Dragon is the largest fund in its peer group and this means that it offers good secondary market liquidity.
The trust has an ongoing charges figure of 1.23 per cent.
Next up Drake says this China focused trust sitting on 15 per cent discount is a good contrarian bet, with its discount much wider than its 12 month average.
Over the past 12 months it has fallen harder than the MSCI China index but is significantly ahead over three years.
Performance of trust and index over 3yrs
Source: FE Analytics
Co-managed by Howard Wang, Emerson Yip, Shumin Huang and William Tong since 2005, the fund’s highest exposure is to large caps with its current largest overweight to the IT sector and also has a large bias to alternative energy firms.
The managers are expecting below trend performance in the stock market for the 18 months but believe that indiscriminate selling makes certain sectors very cheap, Drake says.
“2015 is proving to be a difficult year for the Chinese equity market. The Chinese economic transition continues to develop and with it growth has slowed.”
“If the managers’ view of the Chinese economy is correct and the market continues to recover, we believe that there is scope for [its discount] to tighten and the fund to outperform given its gearing level of 12 per cent.”
The trust has an ongoing charges figure [OCF] of 1.23 per cent.
Last up is Austin Forey’s trust which has a broader remit across emerging markets than the other two of Winteflood’s picks, but has similarly suffered of late.
It currently sits on a 10.8 per cent discount, following a broadly torrid period for emerging markets in the latter half of 2015.
Forey is one of the longest running managers in the space having managed the trust since 1994.
“We rate Austin Forey highly and believe that he benefits from the extensive resources of JPMorgan Asset Management, which has over 100 investment professionals covering emerging markets including Asia.”
“Furthermore, he is an experienced manager who has been responsible for the fund since 1994. JPMorgan Emerging Markets has generated a strong long‐term performance record and it remains our core recommendation in the sector.
Over the past 15 years, Forey has returned more than 100 percentage points more than the index with a gain of 348 per cent.
Performance of trust and index over 15yrs
Source: FE Analytics
“Given the manager’s preferences for high quality growth companies, the fund could lag a ‘bounce‐back’ rally in the asset class, especially if this were to be led by China and/or commodities,” Drake said.
“However, we remain confident that the fund is well placed to continue to outperform over the longer‐term and believe that the current discount presents an attractive entry point.”
The trust has an OCF of 1.16 per cent.