Gary Greenberg, Portfolio Manager
Market and Performance Review
Emerging Markets ended the first quarter up 9.92%, buoyed by more dovish central banks and hopes for a truce on trade between the US and China.
The benchmark MSCI Emerging Markets Index returned 0.84% in March. China outperformed, supported by policymaker’s stimulating domestic demand with a package of tax cuts, infrastructure investment and measures designed to support bank credit growth. India rallied, up 9.23%, on optimism that the current coalition government would return to power in upcoming elections. At the sector level, Real Estate outperformed, and Industrials lagged the most.
The Fund outperformed the benchmark index in relative terms over the month. Stock selection in China contributed the most to relative returns. Selected names in Taiwan also contributed positively, while holdings in the United Arab Emirates, Brazil and South Africa detracted.
Nari Technology, a power grid automation services provider, rose on strong revenue growth driven by power grid distribution automation, new UHV line related products, information communication equipment, cloud services and wireless communication. HDFC Bank and ICICI Bank rose in line with the India market which outperformed. HDFC continues to see healthy consumer demand and now sees growth in some pockets on the corporate side, which is helping maintain steady net interest margins, despite an increase in funding costs. ICICI Bank’s asset quality continues to improve as new non-performing loan ratios will taper further in fiscal 2020. Under its new CEO, the bank is focused on growth, improving operating profits and taking near-term ROE to 15% by June 2020.
NMC Healthcare, a UAE-based private hospitals and pharmaceutical distributor, was weak for technical reasons including short selling. Ultrapar, a Brazilian fuel distributor, fell as fierce regional competition is expected to limit margin recovery. KB Financial, a Korean bank, moved lower given the challenging macro backdrop, the adverse read through for loan growth, constraints from a regulator-imposed pricing cap, higher funding costs and a flat margin outlook that assumes no rate hikes in 2019.
Economies around the world have slumped due to slowing Chinese domestic demand, trade disputes, capital outflows from Emerging Markets, and idiosyncratic shocks such as in the auto sector last year and the tech sector early this year. The global economy is thus vulnerable to a new negative shock, but absent this, corporate sentiment should recover, central banks are less hawkish, and thus we believe a recovery should start soon. PMI surveys across Asia rose in March and importantly Chinese trade has already begun to show signs of life.
Overall, valuations remain reasonable. The Growth style and Large Caps have outperformed Small and Mid-Caps so far this year which fits with a shift to a more neutral stance on behalf of the world’s central banks and thus a benign macroeconomic backdrop for Emerging Markets companies. While oil prices and US wages represent potential headwinds, we think the overall environment is supportive for further gains in the Fund this year.
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.