Gary Greenberg, Portfolio Manager
Market and Performance Review
The benchmark MSCI Emerging Markets SMID Net Total Return Index returned 4.81% in June. Emerging markets moved higher in June buoyed by the prospect central banks will move to avoid a downturn in the form of rate cuts and monetary stimulus. The G20 meeting at the end of the month resulted in the U.S. and China agreeing to keep talking about trade, with no escalation in tariffs. New benchmark entrant Argentina was the best performing market, posting 23.67%, while Pakistan lagged the most, dropping 12.97%. At the sector level, Utilities outperformed, and Health Care lagged the most.
The Fund outperformed the benchmark index in relative terms over the month. Stock selection in China and our overweight to the country which outperformed, contributed the most to relative returns. Selected names in Taiwan and India also contributed positively.
Baozun, a Chinese e-commerce solutions provider, rose after reporting strong 1Q results and guiding good Q2 2019 outlook. Highlights included total revenue increase by nearly 40% year on year and the addition of 15 new brand partners in the quarter. Techtronic Industries, the Hong Konglisted manufacturer of power tools and floor cleaning equipment, moved higher given a minimal impact from the recent tariff increase (from 10% to 25%) and efforts to mitigate its tariff exposure via new suppliers and factories overseas. Shenzhen International, a Chinese logistics infrastructure facilities and services provider, rose as high occupancy rates for its logistic parks and monetisation from its land bank is expected to support strong FY 19 earnings growth and dividend yield.
Tech Mahindra, the Indian IT services provider, fell on softer revenue growth outlook on uncertainty related to 5G rollouts following the Huawei ban and cost pressure related to a tight labour market in the US. IRB Brasil, a leading reinsurance company, fell amid speculation some major IRB shareholders will use the government's planned divestment of its stake as an opportunity to also sell their shares in the reinsurer. Shares in SITC, a marine shipping services and logistics provider, fell as volumes and average selling prices are expected to be flat near-term. Due to the China-US trade dispute, customers were cautious on taking inventory, which caused a slowdown in trade volume within the region. However, at the same time they saw a speeding-up of manufacturing migration away from China, which would help on the trading volume in the ASEAN region.
We trimmed Baozun after a strong move higher year to date and added to several names with attractive upside including NMC Healthcare, Motherson Sumi, Oberoi Realty, Delta Electronics, Advantech and Accton Technology.
After enjoying a second positive quarter, Emerging Markets have recovered much of the ground lost last year due to strident U.S. economic policies.
China’s transition to a consumer-led economy, however, a transition which matters to the rest of the world given its size and role in world trade, has been made much more difficult by U.S. protectionist moves. Global trade volumes have suffered accordingly, as have Purchasing Manager’s Indexes (PMIs), both in Developed and Emerging Markets. As the world economy is in the late stages of recovery from the economic crisis ten years ago, the vulnerability exhibited by economies from Mexico to Korea must be taken seriously.
The prospect of a series of rate cuts from the Federal Reserve provides hope for some relief, but it is unlikely that the U.S. will avoid recession in the coming 18 months, and this prospect will weigh on risk assets. Emerging Markets came into 2019 depressed, at cheap valuations, but earnings revisions have been negative, offsetting this. Declining PMIs unfortunately do not point to what the markets have been hoping for, namely, a reversal of this trend. Lower interest rates would help, but what the world needs right now is progress towards resolution of trade tensions (e.g., U.S.-Europe, U.S.-China, U.S.-Mexico).
Progress here would lead to the gradual repair of policy uncertainty, which in turn would improve corporate confidence, their propensity to invest, and the visibility of growth, something both the bond and the equity markets are finding in short supply now. Longer term, the U.S.-China rivalry will certainly continue, but this need not be fatal to China’s investment case, and to some extent could be said to be reflected in current pricing.
Fund performance returns are in base currency of the Fund and are calculated at close of business, gross of management fees. Fund performance returns at a Share Class level are calculated at midday and are net of management fees. Share Class performance returns can be found on the relevant factsheet. Source: Northern Trust.