Gary Greenberg, Lead Portfolio Manager
Market and Performance Review
The benchmark MSCI Emerging Markets Index fell 4.66% in January which saw the outbreak of the Coronavirus, originating in Wuhan, China. Concerns over the Coronavirus outbreak checked the stock market optimism that followed the signing of a phase one trade deal between the US and China. Markets were less perturbed by the brief flare-up in tensions between the US and Iran, which de-escalated swiftly. Egypt was the best performing market while Hungary lagged as company specific news impacted the stock market.
The Fund outperformed the benchmark index in relative terms over the month. Our country allocation combining currency contributed the most to relative returns, notably our overweight in India which outperformed, and associated exposure to the Rupee which appreciated. Stock selection in Korea and Russia had a positive impact, helping offset weaker stocks in the United Arab Emirates and China.
NC Soft, a Korean online gaming company, contributed the most, given expectations it will report solid Q4 2019 profits thanks to higher-than-expected initial revenue from its newly launched Lineage2M game, as well as a Lineage M revenue rebound leveraging major updates in November, indicating that there has been no user cannibalisation across titles. Bank Rakyat Indonesia moved higher after reporting in line results and with the banks’ strategy to increase profits by growing the more lucrative micro loans to 40% of its loan book, up from 36% currently and lower corporate loans. IRB Brasil, a reinsurer, moved higher as falling retrocession costs, in light of technological improvements, is expected to drive an improved pricing process.
Shares in NMC, which owns and operates hospitals in the Middle East, have fallen more than 60% since short-seller Muddy Waters last year questioned its asset values, cash balance and debt levels. The claims have been rejected by NMC, which has appointed former FBI director Louis Freeh to carry out an investigation into the allegations. Nari Technology, a mainland China smart grid equipment supplier, fell as the State Grid Corporation of China (SGCC) unexpectedly announced a new Chairman, raising concerns about the pace of future grid investment which had been supported by the previous incumbent. Samsonite, the global luggage provider, fell as luggage demand, particularly from the Greater China region, is expected to be negatively impacted by government efforts to contain the spread of the Coronavirus and as its China based supply chain could face some temporary disruptions.
Market sentiment following the Coronavirus outbreak is negative, as it impacts the nascent economic recovery in China. However, the situation is likely to be temporary as the Chinese government has stepped up efforts to contain the spread of the virus. The imposition of travel restrictions, extension of the Lunar New Year holiday, and the closure of large tourist attractions illustrate efforts to contain the pandemic.
We have no positions in the most vulnerable country, Thailand, which has a high dependency on tourism, and are underweight but looking to add to our position in China and take it to overweight as the market continues to sell-off. China has already endured a lot of pain, from trade wars to protests in Hong Kong to instances of financial distress at the local level, but it is not “broken.” As of now, the virus is far from being contained but robust measures are being put in place and we anticipate an eventual peak in both the epidemic and the response. If anything, the move to automate production, digitise consumer behaviours and create an AI infrastructure will only accelerate. Timing the peak in the news flow is very difficult so we will be scaling in over a period of time. The Indian market, where we are overweight, is benefitting.