Kunjal Gala, Lead Portfolio Manager
Market and Performance Review
The benchmark MSCI Emerging Markets Index rose 2.21% in August. Emerging market equities rose in August for a fifth consecutive month. Positive economic data from China and signs of global growth over the third quarter, supported investor sentiment despite the continued spread of the virus which recorded 25 million cases globally. China Manufacturing PMI data for July came in at 52.8, indicating sustained expansion. Economic data for China in July was generally positive pointing to a continued recovery. India, Indonesia and South Korea reported a rise in daily new COVID-19 cases. However, the number declined in most other Asian countries. In Brazil, while the number of new cases remains high, the pace of gains slowed in July. The US Dollar moved lower against most major currencies after the US Federal Reserve affirmed its dovish stance and pledged support for further stimulus.
The fund outperformed the benchmark index over the period. Stock selection contributed to relative returns, notably in India and Russia. The (underweight) exposure to China also benefited as the Renminbi appreciated.
Techtronic Industries, a Hong-Kong listed manufacturer of cordless powertools, rose after reporting strong quarterly results driven by innovation in new product development. Techtronic has benefitted from the positive momentum in DIY and strong traction in ecommerce sales. Bharat Forge, a global manufacturer of automotive engine components, rose after quarterly results beat consensus expectations for EBITDA and highlighted an impressive focus on cost control and productivity, whilst operating at a lower utilisation capacity. Yandex, Russia’s leading search and e-commerce provider, rose on the improving outlook for both its taxi business and the Russian economy and currency. The company also benefited from the MSCI August rebalance and subsequent inclusion to the index.
Non exposure to Meituan Dianping, a Chinese e-commerce provider, detracted after the company reported a strong second quarter which highlighted expedited growth and an increase in market share in its food delivery business. Samsung Electronics underperformed on continued weakness in the DRAM industry and on concerns that the Huawei ban may act as a further headwind for its memory business. Delta Electronics, a Taiwanese global leader in switching power supply solutions, retreated as investors took profits following strong performance year-to-date.
The team sold Galaxy Entertainment given the impact of COVID-19 on the Macau casino and resort operator as well as an update to our exclusions policy. They trimmed several names including Tencent, Alibaba and Samsung Electronics following strong performance year to date. They continued building positions in Epiroc, a Swedish-listed mining tools and equipment company which derives most of its revenue from emerging markets countries, and Polymetal, a leading gold producer.
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. 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 the second wave lasts longer and economies are lockdown again. Also, the timing and efficacy of vaccines under development is far from clear, the business/consumer sentiment remains low and geopolitical tensions are rising. With US elections coming up, the Trump administration has engaged in an expanding clash with China on various fronts from Huawei, Hong Kong, apps such as TikTok, We Chat and 5G wireless technology to a blame game over Covid-19 and Taiwan. Tensions and rhetoric have escalated recently as the US election draws closer. The team believes that the world is likely to remain in a slow growth environment after the initial rebound. Hence, the Fund remains focused on growth/quality and marginally adding to cyclicality where the team feel that there is enough margin of safety and the company benefits from medium/long term catalysts.