Gary Greenberg, Portfolio Manager
Market and Performance Review
The benchmark MSCI Emerging Markets Index rose 9.16% in April. Markets rebounded strongly in April as some countries saw daily new infection rates start to fall and are planning to gradually reopen their economies.
Governments and central banks introduced very significant stimulus measures to reduce the damage caused by the economic shutdown, restoring some positive sentiment to markets. Several emerging market central banks cut rates to support their economies, including South Africa and Turkey contributing to weaker currencies, which reached new lows against the Dollar. China’s economy has been gradually reopening. Firstquarter real GDP declined by 6.8% year on year (-5.2% for the service sector). However, since March, there has been a recovery in production, retail sales and investment. The People’s Bank of China increased its monetary stimulus, cutting the one-year targeted medium-term lending facility (TMLF) rate by 20 basis points (bps) to below 3% and the one-year and five-year prime rate loans (PRL) by 20bps and 10bps respectively.
Social financing data showed an acceleration in loan issuance, reducing liquidity risks. Commodity-sensitive markets including Russia and Saudi Arabia recorded double-digit returns given optimism oil prices can recover as supply is constrained to meet lower demand.
The Fund underperformed the benchmark index over the month. Stock selection detracted the most to relative returns, notably stocks held in South Africa, South Korea and Indonesia, eclipsing stronger stocks in India and Taiwan.
Shares in Accton Technology, a Taiwanese manufacturer of high-speed 100G and 400G switch solutions, rose on strong March sales which indicate the smooth resumption of production in China and as an increase in data traffic is expected to drive demand for more networking bandwidth long-term. Hero Motorcorp, an India manufacturer of two-wheelers, rose given more resilient rural demand, valuation support (9.4x Financial year PE, a 20% discount to history) and strong free cash flow generation. Delta Electronics, a Taiwanese global leader in switching power supply solutions, rose despite weak Q1 2020 results impacted by coronavirus, as management expects a seasonal improvement in both revenue and margins in Q2 2020 (as China production normalises).
Shares in Shoprite, a South African retailer, fell as currency weakness and the oil price volatility is expected to negatively impact customers’ purchasing power in key markets such as Angola and Nigeria. We further reduced our position in a move to raise our underweight to South Africa given the double whammy of a sovereign credit downgrade alongside the crisis effects on growth and global risk aversion which creates a toxic return cocktail for local equities. Nari Technology, a mainland China smart grid equipment supplier, underperformed the rebound in April, following strong relative outperformance in the first quarter. NC Soft, a Korean online gaming company, fell as its Lineage 2M game gross revenue ranking slipped to number two for the first time since its release in November 2019 raising concerns users are boycotting the game, owing to its aggressive monetisation strategy. We believe the ranking should change again once L2M introduces an update on April 29.
The corporate landscape that evolves after the COVID-19 pandemic will be different to what came before. Amid the economic damage, there will be innovation and progress, and many businesses will become stronger as a result.
The team believe that the Emerging Market structural-growth story remains intact, driven by an aspiring, growing middle class, rising digitisation, reforms and infrastructure development. As industries consolidate, companies with strong balance sheets and capabilities will benefit from these structural drivers.
Overall, we view the current environment not as a threat, but as an opportunity to increase our exposure to excellent, quality companies that are now available at discounted prices.