Gary Greenberg & Kunjal Gala, Co-Portfolio Managers
Market and Performance Review
The benchmark MSCI Emerging Markets SMID (net TR) Index rose 8.45% in July. Emerging Market equities rallied again in July and continued their recovery for a fourth consecutive month. Positive economic data from China and the sell-off of the US Dollar, which recorded its worst month in over a decade, supported investor sentiment, despite a resurgence in Coronavirus outbreaks and elevated US-China tensions. The increase in new cases in Brazil and India continued in July, while recent outbreaks in Hong Kong have seen the reintroduction of some restrictions. China’s official Purchasing Managers’ Index readings for July were positive and new orders rose boosted by a surge in exports. Peru was the best performing market, pulled higher by a precious metal mining company which outperformed significantly over the month. Turkey was the worst performing country amid fears the US might impose sanctions against Turkey for purchasing Russian military hardware. Investors were also concerned that Turkey’s central bank is depleting its foreign exchange reserves to help stabilise the Lira in the currency markets.
The Fund underperformed the benchmark index over the month. Stock selection in China and Korea detracted, offsetting strong relative returns in Taiwan and Russia.
Delta Electronics, a Taiwanese global leader in switching power supply solutions, rose as earnings for its power business are expected to jump driven by strong PC/server demand momentum. The company’s’ leading position in power should ensure it keeps benefiting from increasing cloud applications and telecom infrastructure upgrades. Its Industrial Automation (IA) business should also benefit from ongoing supply chain relocation and increasing automation. Eugene Technology rose due to increasing prospects of sales of its Wafer Deposition equipment to Samsung, Micron and Hynix. Korean memory manufacturers are now localising their supply chain, and Eugene Tech is the only Korean equipment maker that can replace the Japanese vendors in the LPCVD BATCH space. Duratex, a Brazilian manufacturer of wood panels, sanitary fittings and building materials, rose after the company’s Q2 2020 results beat expectations and signalled an impressive recovery in June and optimistic outlook for Q3 2020.
NC Soft, a Korean online gaming company, retreated in July after the stock had performed well on strong prospects for its existing hit titles, the overseas launch of its L2M (Lineage 2M) game and the release of Blade & Soul 2 which are expected to further propel earnings. NC Soft has benefitted from increased traffic and favourable dynamics as a result of stay at home arrangements. Landmark Optoelectronics, a Taiwan-based manufacturer and distributor of wired communications machinery and electronic components, fell after reporting disappointing Q2 2020 sales results due to a subpar performance in shipments of 100G silicon photonics products. However, the company expects the second half of 2020 operations to rise fuelled by 5G applications. SITC International, which offers marine shipping services, underperformed amid renewed US-China tensions and supply chain disruptions.
The team initiated a position in Sunny Friend Environmental Technology, an industrial infectious waste disposal company which operates medical and industrial waste treatment plants. The company uses technology to handle various types of hazardous waste and collects, incinerates, solidifies, and develops solutions to streamline the disposal. The company recovers materials from waste, recycle resources, and conducts environmental tests to discover innovative solutions. Sunny Friend is the only listed medical and industrial hazardous waste company and is well-placed for an ongoing expansion into China.
The team also initiated a position in Tokai Carbon Korea, a subsidiary of Tokai Carbon Japan. The company manufactures silicon carbide rings (SiC) that are widely utilised during the etching process in the NAND market and produces single silicon crystal and purified graphite products mostly for the semiconductor industry in Korea. Tokai Carbon also makes LED susceptors that are designed to improve wear and chemical resistance when manufacturing light-emitting devices. Today, TCK is the only company that has the technology, and manufacturing know-how to make SiC rings.
Emerging Markets have rallied strongly from the March bottom, initially driven by unprecedented central bank and government monetary and fiscal stimulus, subsequently from a gradual relaxation of lockdowns as markets anticipate an economic recovery in the second half of 2020. The broadening out of the recovery has extended investor interest to more value sectors, sensitive to the economic recovery and trading at low valuations (at one-point trading close to GFC levels). Market sentiment has improved, and the focus has shifted to a sharp rebound in economic activity.
However, investors must weigh the possibility of further economic damage if there is a second wave and economies move towards lockdown again. Also, the timing and efficacy of vaccines under development is far from clear, the business/consumer sentiment remains low and tensions between the US and China are rising over Huawei and Hong Kong. Crucially, the team believe that the world is likely to remain in a slow growth environment after the initial rebound. Hence, the Fund remains focused on Quality Growth and marginally, adding to cyclicality where they feel that there is enough margin of safety and the company benefits from medium/long-term catalysts.