Terry Smith/EM: macro attack beats veteran stock picker

Long-term investor Terry Smith does not believe in trying to time the market. News that his Fundsmith Emerging Equities Trust is closing must just be a coincidence.

As US interest-rate forecasts rise, the outlook for emerging markets is deteriorating. Smith is not the first star British stock picker to find that a winning approach in familiar markets works less well further afield. He deserves credit for the attempt — and the decision to hand back capital.

Shares in the £319mn fund rose sharply on Wednesday, reversing much of the 15 per cent discount to net asset value. The prospect of an even stronger US dollar means Smith is letting investors out not a moment too soon.

The greenback has risen to 20-year highs amid raging global inflation and soaring interest rates. Emerging market central banks can either increase the price of money to protect currencies or suffer full-force inflation. Global commodities are largely priced in dollars, lifting import costs.

Since the start of 2021, returns from the MSCI Emerging Market index have underperformed developed nation indices by a fifth. The index is down 15 per cent this year in local currency terms. At 11 times forward earnings, the discount for emerging markets sits at almost one-third.

Rich returns may still be found, sometimes where ethical investors disdain to tread. Saudi Arabia and the other Gulf states are strong investments, according to JPMorgan’s David Aserkoff. The Saudi Tadawul index has risen on dollar export earnings. Lowly ESG rankings are keeping allocations low. At 16 times forward earnings, the market’s valuation is back in line with 2019 levels.

Deglobalisation means some other economies are decoupling and their cycles are becoming more localised.

Is Smith quitting the scene of battle just when life may be getting easier for active managers? Probably not. Macro trends will continue to matter more than granular company characteristics. No international news is good international news for the stock picker. At present, it is abundant.