Ian Cowie: how to profit from a historic free trade deal

Our columnist explains the investment trusts he expects to emerge as winners.

19th November 2020 10:30

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Our columnist explains the investment trusts he expects to emerge as winners from one of the biggest trade deals in history.

A free trade deal, covering more than a dozen countries with 30% of the world’s economic output and a similar percentage of its population, is no longer a figment of the imagination of former secretary of state Liam Fox. Now it is a fact and investors should consider allocating assets accordingly.

Not in Europe, though, as this business-boosting agreement was made in the Far East. That’s where 15 countries - including Australia, China, Japan, South Korea and New Zealand - have signed a treaty to remove barriers to trade.

The Regional Comprehensive Economic Partnership (RCEP) is one of the biggest export and import agreements in history.

China’s premier Li Keqiang described the deal, signed in Vietnam on Sunday (15 November), as “a victory of multilateralism and free trade”. Singapore’s prime minister Lee Hsien Loong agreed:

“This is a major step forward. At a time when multilateralism is losing ground, the RCEP shows Asian countries’ support for freer trade and closer interdependence.”

How very different from the direction of travel here in Europe, where we have just a few weeks left before the end of Brexit’s transitional period. Perhaps that’s when Fox will unveil the 40 free trade deals he promised were “ready to sign one second after midnight”. Never mind the politics, though, what about the economics?

The good news is that it has never been easier for individual investors to gain exposure to growth and income being generated on the other side of the world. Investment trusts provide professionally managed access to markets that trade in foreign currencies while we are asleep, to deliver income or growth, or a mixture of both.

This would be a good time to fess up to easily the most expensive mistake I have made this year. That’s when fears about China’s treatment of ethnic minorities and its trade war with America prompted me to sell all my shares in Fidelity China Special (LSE:FCSS) and JPMorgan Asia Growth & Income (LSE:JAGI) in April.

What a howler. I dumped shares in FCSS at 227p that traded at 376p this week and sold shares in JAGI at 359p that subsequently soared to 471p.

Well, we can’t win them all and at least I don’t need to worry about complicity in human rights abuses or potential compensation claims arising from the coronavirus crisis. Remember, American commercial law scarcely recognises the concept of a fault-free accident, as this shareholder in Royal Dutch Shell (LSE:RDSB) knows to his cost.

On a brighter note, Japan looks set to be a major beneficiary of the RCEP agreement and Baillie Gifford Shin Nippon (LSE:BGS) remains a top 10 holding by value in my “forever fund”. This £760 million star of the Association of Investment Companies (AIC) Japanese Smaller Companies sector is its top performer over the last year, five years and decade. It has delivered total returns of 46%, 245% and 960%, respectively.

No wonder the shares trade at around 10% premium to net asset value (NAV), even when yielding no dividend income. I have been a BGS shareholder for more than a decade, transferring the stock from a paper-based broker to my current platform in 2013.

Last December, I diversified my exposure to this sector by buying shares in JPMorgan Japan Smaller Companies (LSE:JPS), partly prompted by a dividend yield currently delivering 3.6%. As happens so often, the price of a higher income has been lower total returns, with JPS delivering 35%, 147% and 344% over the last year, five years and decade.

But shareholders in both these trusts have nothing to grumble about, compared to those in another Asian asset of my “forever fund”, Henderson Far East Income (LSE:HFEL). Paying 7.3% dividend income, this has the highest yield in the AIC’s Asia Pacific Income sector and trades at a modest 1.1% premium to NAV.

Sad to say, HFEL is also the worst performer over all three of the AIC’s standard time periods, delivering total returns of -6.3%, then positive returns of 55% and 72%, respectively. By contrast, JAGI is the top performer in this sector over all three periods with total returns of 30%, 169% and 149%, respectively.

Such stellar growth more than makes up for a relatively modest dividend yield of 3.4%. As if to rub salt in my wounds, JAGI levies lower management costs than HFEL, with ongoing charges of 0.74% for the former compared to 1.1% for the latter. BGS is even better value, with the AIC calculating its ongoing charges at just 0.73%.

Returning to where the RCEP deal was signed, this shareholder in Vietnam Enterprise (LSE:VEIL) hopes capital growth can make up for an absence of income from Hanoi. I paid 404p per share in July 2018, for stock that traded at 518p this week. Vietnam is a competitive beneficiary of rising labour costs in China and any deterioration in the latter’s relationship with the rest of the world.

Here and now, the RCEP agreement also includes all 10 members of the Association of Southeast Asian Nations (ASEAN) - Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam - aiming to create something similar to the original European Economic Community (EEC) of 1958. Whether or not Britain participates, British investors should consider doing so because the RCEP represents a major step towards creating what might prove to be the “Asian century”.

Ian Cowie is a shareholder in Baillie Gifford Shin Nippon (BGS); Henderson Far East Income (HFEL); JPMorgan Japanese Smaller Companies (JPS); Royal Dutch Shell (RDSB) and Vietnam Enterprise Investments (VEIL) as part of a globally-diversified portfolio.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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