Far-flung investment trust opportunities

Charlotte Cuthbertson sees the potential for growth in four emerging markets.

A trade war and a slowdown in global growth conditions are less than favourable for emerging markets. Nevertheless, there are opportunities that arise from structural change. We are focused on four markets, each very different, that give us access to interesting growth stories.

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With markets reeling from the trade war between the US and China, our exposure to Vietnam is a net benefactor of the issue, although it may not feel like that in the short term in share price movements. There are many instances where companies are moving production out of China into Vietnam in order to escape Trump’s tariffs, and so short-term volatility may present a good opportunity to buy.

Vietnam has compelling demographics, it is transitioning from a rural to an urban economy, and the government is slowly selling off state-owned enterprises to the private sector. These sales create depth in the Vietnamese market that allows trusts such as VinaCapital Vietnam Opportunities to participate in this process. The trust has been very successful in this area over the past few years, while also having a listed and private equity portfolio. As a FTSE 250 constituent, it is surprising to see this trust trading on a wide discount.

However, the trade war and riots in Hong Kong has meant that sentiment towards Macau has been poor. Many of the casinos in Macau are operated by US companies and must renew their licences during the next 18 months. Suffice to say, the timing could be better.

Yet we believe that the Chinese will be pragmatic, as they have invested heavily into the Greater Bay area and would not like to disrupt the progress being made.

In the worst-case scenario, there are Chinese casino operators that are able to take over. With the expansion of existing casinos and the development of new casinos, this will require more staff and increase demand for residential flats in Macau.

Macau Property Opportunities, which owns residential properties should do well from this shift. The trust trades on more than a 40% discount, despite being in realisation, where they are selling their properties and handing the proceeds back to shareholders at net asset value.

The riots in Hong Kong are likely to prompt China to reward Macau for its loyalty and the province could see some positive reforms. The new CEO, who will be sworn into office in December, is likely to get policy “gifts” from the mainland as part of the handover process.

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India has been one of our favoured emerging markets for many years. During the tenure of Prime Minister Narendra Modi, several reforms have been passed to help fight corruption and push towards the formal, taxable economy. These include demonetisation, financing ailing state banks and introducing a goods and services tax. Although disruptive in the short term, this will be ultimately beneficial to listed companies as the black economy becomes smaller.

In the short term, issues in the non-banking finance sector have put pressure on the economy as these have become the lenders to small- and medium-sized businesses. Non-banking finance has been struggling with funding issues that impairs their ability to lend to SMEs. Despite these headwinds, we still believe that the medium- to long-term investment thesis for India remains intact.

Finally, we have an investment in Georgia Capital. Georgia lies at the crossroad of Western Asia and Eastern Europe. It has become a conduit between the region and Western Europe, performing a role not too dissimilar to that of Singapore in Asia.

In 2018, a survey ranked Georgia sixth out of the 190 easiest countries to do business with, and since the revolution there has been a dramatic reduction of crime and corruption. The trust was spun out of Bank of Georgia after the combined entity became too large to manage at 16% of national GDP.

Its portfolio consists of private ventures in wine, education, renewable energy, and water supply as well as London-listed investments; Georgia Healthcare and Bank of Georgia. Both companies trade at a discount to their intrinsic value creating a double discount as the trust also trades at 27% below its net asset value.

Charlotte Cuthbertson is assistant fund manager, Miton Global Opportunities.

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