Navigating emerging markets in a rising interest rate environment 

Navigating emerging markets in a rising interest rate environment: Mobius Investment Trust.

 

 
2022 has been turbulent across the globe. Russia’s invasion of Ukraine, the lingering aftereffects of the pandemic, and geopolitical tensions have all contributed to investor uncertainty year to date.

The continued hawkish tone of the Federal Reserve which signalled a noticeably higher terminal rate than previously expected in its August Open Market Committee, added to worries about a looming recession and the International Monetary Fund recently cut its global growth forecast 0.5% for 2023.

All this has resulted in a broad “risk-off” environment leading to a historical relative undervaluation of many emerging markets. 

The team managing the Mobius Investment Trust has decades of experience in investing in emerging markets. While no doubt these are challenging times, the good news is many emerging markets are in a stronger position than they were in the last tightening cycle with lower foreign debt, less leverage in the private sector and prudent central bank policies that have put them ahead of the Federal Reserve in the cycle. 

We believe, in an environment of high inflation and rising interest rates, investing in fundamental quality – thus companies with pricing power, strong balance sheets, little to no debt and leading brands – becomes even more important.
 

‘pricing power, strong balance sheets, little to no debt and leading brands – becomes even more important’

 
The low debt levels provide companies with some resilience against the impact from rising debt servicing payments, while a strong brand and pricing power should enable them to pass on input price increases to their customers.

Furthermore, an experienced management team that has been through numerous economic cycles should be well equipped to navigate troubled waters. We have also found that focusing on companies with a strong and improving ESG-footprint will provide some downside protection. Furthermore, improving ESG standards is not only a risk management tool. Countless studies suggest that ESG integration is a source of alpha in the long run.  

It is important that you monitor your portfolio very closely and revisit every business case in view of a changing and challenging macro-economic environment. It is strongly to the advantage of the Mobius Investment Trust’s concentrated portfolio that the team is in close and regular contact with management teams as part of their active ESG+C® engagement. This enables them to better understand the challenges companies are facing and how they are addressing them.  
 

‘Countless studies suggest that ESG integration is a source of alpha in the long run’

 
At the same time, we would emphasise the importance of looking at the long term. Questions one should ask are: How are your companies positioned when the recovery sets in? What will the demand for your companies’ products look like over the next 10 years? The Mobius Investment Trust carefully selects companies which we believe can deliver sustainable returns for many years to come.  

Finally, as Sir John Templeton once wisely put it “the time of maximum pessimism is the best time to buy.”

Valuations are at multi-decade lows and some companies have been unfairly dragged down by the current sentiment. It is the task of the diligent, active investor to find these companies.

The Mobius Investment Trust has used the recent volatility to add some highly innovative companies to the portfolio. Their share price had been impacted by negative investor sentiment which did not reflect the fundamental quality and compelling business case these companies present.  
 
 

Mobius Investment Trust in more detail

Since inception in October 2018, the Mobius Investment Trust is the best-performing EM equity investment trust listed on the London Stock Exchange. With an active share of over 98% and the Trust’s differentiated investment approach focusing on innovative, quality companies in the emerging markets universe, the strategy has delivered outsized returns and is leading the peer group with a net asset value return of over 25% since inception. 

Integrating environmental, social and governance (ESG) + Culture factors in the research process and engagement is a core component of the Trust’s investment process. The team has added corporate culture to their analysis. 

Whilst some may categorise this factor within governance or even social, the team believe culture warrants a distinct and separate categorisation. There is strong evidence showing that ESG leaders outperform their peers. The Mobius Investment Trust’s team believe that by integrating corporate culture into the investment process, the outperformance should be greater. 
 
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