Recent events have increased expectations of a new Trump presidency. The ramifications of this are widespread (and fairly depressing) but one aspect that I thought I might focus on this week is the potential impact on emerging markets trusts.

Biden already has a pretty robust stance on relations with China. He has made it clear that its sabre-rattling in the South China Sea will not be tolerated and restated his support for Taiwan. By contrast, Trump has declared that Taiwan should be compensating the US for the protection it provides. He wove this into an argument that Taiwan has taken almost all of the US’s semiconductor industry. It was not all good news for China, though, as he has also threatened to impose sizable tariffs on Chinese imports.

On Mexico, Trump has suggested sending US troops into the country to battle drug gangs – whether the Mexican government gives permission for that or not. More widely, Trump’s protectionist instincts would likely weigh on Latin American exporters.

In Eastern Europe, as support for Ukraine waivers under a Trump-Vance ticket, nervous investors may avoid its near neighbours, many of which may be next on Putin’s hit list.

In the Gulf region, Trump family interests, which include a new Trump tower being built in Jeddah and a hotel in Oman, may mean that relations are relatively warm. However, while increasingly important to emerging market funds, the Gulf alone cannot carry the index higher.

The big unknown is how India might be affected. Again, protectionism and Trump’s perception of the balance of trade could be unhelpful – the US ranks alongside China as India’s largest trading partner. However, while export growth has been accelerating, India’s gross domestic product growth has not been reliant on it.

Granular approach

Calling the direction of individual emerging markets has always presented a challenge to investors in the region. There are some factors – such as US interest rates/the strength of the US dollar – that affect almost every country, but others are more idiosyncratic. Managers can tackle that head on by making individual country bets, minimising geographical impacts on returns, or ignoring them completely to focus solely on picking stocks.

The dispersion of returns is pretty wide. Based on MSCI indices and in sterling terms, over the 12 months ended 30 June 2024, some frontier markets such as Pakistan, Turkey and Romania lead the pack with returns over 50%. India, Taiwan, and Poland all made more than 30%. However, Hong Kong, Thailand, and Indonesia were all down by more than 10%. China, which still dominates the MSCI EM index, was flat.

How GEM trusts have played the outlook

On the back of this, global emerging markets (GEM) trusts have been making net asset value gains over the past year. Fidelity Emerging Markets (FEML ) leads the pack, with total returns of 21.6%, helped by India being its largest weighting (although at the end June it was underweight at 18.6% versus 19.2% for the benchmark, according to the factsheet). Its significant underweight to China also helped. It will be interesting to see if that changes, given Fidelity China Special Situations (FCSS ) manager Dale Nicholls’ optimistic outlook on China.

Fidelity Emerging Markets had a torrid time initially, caught out by Russia’s invasion of Ukraine, but has staged a strong recovery over the past year, with net asset value up 21.6% and a share price up 27%. The trust has a big overweight exposure to Hong Kong that is more than offset by an underweight exposure to China and Taiwan.

One of its big winners has been a Kazakh fintech company, Kaspi, whose share price is up about 42% so far this year. However, it has also been highlighting the contribution that its largest holding – Taiwan Semiconductor Manufacturing or TSMC – has made to returns.

After rising 63% over 2024 on the back of the AI story, at the end of June, TSMC was the largest stock in the MSCI EM index with a weight of 9.7%. FEML was overweight then at 11.7% of the portfolio. Trump’s remarks and some profit taking mean that TSMC is over 10% off a high reached earlier this month, but whether you called it correctly has made a big difference to managers’ returns relative to the benchmark.

It has helped that TSMC pays a decent dividend, which made it eligible for inclusion in the portfolio of JPMorgan Global Emerging Markets Income (JEMI ) – which I have a holding in – and has helped it to third place of the global emerging trusts over the past year.

Ashoka Whiteoak Emerging Markets (AWEM ) occupies second place, with net asset value up 13.8% and share price up 12.7%, according to Morningstar. The management team headed by Prashant Khemka is firmly in the camp that stock picking should drive the portfolio’s geographic weights.

The trust is now just over a year old and has established a decent record of beating the benchmark, ahead by 4.5% at the end of May 2024. That is good news for the managers who do not earn a base fee but instead rely on performance fees. However, with a market cap of just £37.8m, it is still likely to be a loss-leader.

The aim is to expand the trust significantly and to that end it made advances towards Abrdn’s Asia Dragon (DGN ) in May. That triggered a review at Asia Dragon that is still ongoing. It will be interesting to see who comes out on top there, but Ashoka offered a 50% cash exit at a 1% discount as part of its pitch, and that is going to be hard to beat.

It is worth highlighting that Ashoka Whiteoak Emerging Markets’ decent returns have been achieved even with a sizable underweight exposure to TSMC (6.5% of the portfolio at end May 2024). However, drawing on the manager’s expertise in the country, the portfolio does have a significant bias to Indian stocks, and these have made a useful contribution.

A Trump win is likely to be unhelpful for the macroeconomic picture for many emerging markets, but there will be winning and losing countries, stocks that can forge ahead regardless and managers that can navigate the inevitable gyrations in sentiment, as they have always had to do.

James Carthew is head of research at QuotedData.

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