Gary Greenberg & Kunjal Gala, Co-Portfolio Managers
Market and Performance Review
Emerging Market equities rallied 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. Taiwan was the best performing market pulled higher by chipmaker and index heavyweight, Taiwan Semiconductor Manufacturing (TSMC). 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 outperformed the benchmark MSCI Emerging Markets Index over the month. The outperformance was driven primarily by stock selection, notably in Taiwan and Russia.
TSMC, the semiconductor manufacturer, rose sharply after US chipmaker Intel announced it may look to third parties to help manufacture its chips containing 7-nanometer transistors. TSMC, which is a foundry business, is seen as a contender for winning some of the outsourced business. 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. China Mengniu Dairy, a leading dairy producer in China, rose on expectations for strong H1 2020 results and continued sales growth driven by an accelerated demand for healthier foods.
AIA fell due to investor concerns that the insurers’ Hong Kong offshore sales will be negatively impacted by US-China tensions surrounding the HK national security law, rising social unrest, as well as the US announcement on eliminating special treatment to Hong Kong. NC Soft, a Korean online gaming company, retreated 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. HDFC Bank, an Indian financial services company, underperformed after the Reserve Bank of India released a financial stability report which spooked investors. In stress-testing different scenarios, they estimated NPL's could rise to the highest level in over 20 years (14-14.5%), negatively impacting sentiment which resulted in a sell-off across the segment.
The team sold Notre Dame Intermedica following a strong performance and change to the company valuation. They initiated a position in Epiroc, a Swedish-listed mining tools and equipment company which derives most of its revenue from Emerging Markets countries. Epiroc is the highest quality metals and mining capital goods company in the market and stands to benefit from a number of existing trends including increased automation, electrification and the broader application of software to improve mining productivity. The team also feel that the company offers exposure to the materials sector without compromising on ESG standards.
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.