Gary Greenberg, Portfolio Manager
Market and Performance Review
Equity markets fell as the US announced tariff increases on US imports from China. China was the worst performing market amid fears the reemergence of trade tensions will impact the growth outlook, causing the renminbi to fall 2.5% against the Dollar. Elsewhere, India outperformed as its six-week long general election concluded with a surprise super-majority for incumbent Narendra Modi and his Bharatiya Janata Party (BJP). The victory removes a major overhang for the economy and market, providing some clarity on the policy outlook and hope for continuing reform progress.
The benchmark MSCI Emerging Markets Index fell 7.26% in May. All sectors were in negative territory during the month, Consumer Discretionary lagging the most and Utilities outperforming.
The Fund underperformed the benchmark index over the period in relative terms. The overweight in China which underperformed, and associated exposure to the currency which depreciated, detracted the most to relative returns offsetting positive stock selection within the country. Selected names in Taiwan and the United Arab Emirates also detracted.
HDFC, India’s largest private bank, rose following the election result and analysts’ upbeat assessment of the next leg of growth. Notre Dame Intermedica, one of Brazil’s largest private healthcare providers, rose after reporting solid Q1 2019 results driven by further vertical integration, improved cost controls and synergies from its GreenLine acquisition. Nonexposure to Baidu aided returns as China’s major search provider reported weak Q1 results and soft Q2 guidance.
Shares in NMC Health, the UAE-based healthcare provider, fell because of rising short interest, absent any newsflow. Tencent, China’s leading social media platform, fell on seemingly soft Q1 2019 mobile gaming revenue which was largely due to temporary issues such as revenue recognitions and content launch timing and concern that the China-US trade dispute might turn into a tech war. Samsonite, a global luggage provider, fell as the US tariff increase to 25% is expected to impact earnings.
The current dispute with China is, in our view, the beginning of a long-term rivalry between the two superpowers and the US is unlikely to pivot back to the constructive stance it held toward China during the prior two centuries. However, a full-fledged trade war should cut China’s real GDP growth rate to 5.8% this year and 5.6% in 2020 (from around 6% in both years in a base case). China’s slowdown, should it happen, will affect economies all over the world.
Economic surprises in Emerging Markets, as businesses react cautiously to this possibility, have been missing expectations recently. The Chinese stock market is trading at its long-term average (Bloomberg consensus) earnings multiple as of this writing, largely ignoring the recent improvements in profitability in Chinese corporates in recent years. We agree that the risks are evenly balanced: a deal would spark a rerating, “no deal” probably a derating in the short-term. Looking further out, we think China has found an invaluable and powerful new source of motivation towards economic and technological self-sufficiency and that the country will find a way to overcome this obstacle and emerge stronger, in economic, technological, and geopolitical terms, than it is today.
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.