Gary Greenberg, Portfolio Manager
Market and Performance review
The benchmark MSCI Emerging Markets SMID Net Total Return Index returned 1.53% in US Dollar terms in September. Markets rose as trade negotiations showed more positive signals after President Trump delayed a tariff increase that had been scheduled for October 1st, and after the US Federal Reserve cut interest rates. Geopolitical tensions rose in the Middle East, where Saudi Arabian oil facilities were attacked, sending the oil price 15% higher on supply concerns. China’s economy continued to slow, with industrial production growing at 4.4%, down from around 7% at the start of 2018, reinforcing the need for more policy measures to support domestic activity and offset weaker external demand.
The Fund underperformed the benchmark index in relative terms over the month. Stock selection in Taiwan detracted the most, offsetting the positive impact from selected names in the United Arab Emirates and India.
Nari Technology, a leading provider for power and automation technologies in China, rose on expectations for an acceleration of grid investment in the second half of 2019 and sustainable growth in secondary/grid automation equipment demand. Shares in NMC Healthcare, an integrated, private healthcare operator in the Middle East and Europe, rose after a strong set of first-half 2019 results. While the stock has been heavily shorted, we view bear arguments as lacking merit in view of the company’s results. NMC executed well on cash conversion and organic growth and a partial removal of pledged stock by strategic shareholders. Mavi, a fast-fashion apparel retailer in Turkey, rose as the company delivered strong quarterly results driven by solid growth in both domestic and international sales.
Sinbon Electronics, a cable-assembly and connector-trading solutions provider based in Taiwan, fell the most after the stock was subject to profit-taking following a strong performance year-to-date. Sales and earnings growth momentum is expected to trend down in the Q4 from the previous quarter on seasonal weakness, in-line with normal seasonality. Delta Electronics, a Taiwanese manufacturer of power supplies, underperformed due to weakness in the PC and notebook market and industrial automation recovery has been slower than expected. Baozun, a Chinese e-commerce solutions provider, fell post the results due to growing concern over market maturity and the potential churn of large brands.
Currently, Emerging Markets are trading at a moderate discount on price-to-earnings and a significant 30%+ discount on price-to-book relative to Developed markets, despite enjoying a similar level of profitability. Globally, central banks are in an easing cycle led by the Federal Reserve, and bond yields are likely to remain lower for longer. Global Purchasing Managers' Index (PMI) data already points to a manufacturing recession. We expect the services sector will follow suit, employment levels will start to fall in the U.S., and any monetary response to be insufficient for a global rebound. We anticipate a consensus to form around the need for a spending boost, starting in Europe, spreading to the U.S. and from there to Emerging Markets, over the next 18 months.
Few countries within Emerging Markets have major macro vulnerabilities at this time, unlike in 2013, and most markets offer positive interest rates after adjusting for inflation. This backdrop of slower economic growth, a wide valuation discount, and lower yields are particularly beneficial for asset prices in economies that can grow despite global headwinds like trade wars. We remain focused on several attractive secular themes, such as the rollout of 5G, digitisation, logistics, premiumisation, and demand for Health Care and Financial Services remain in place and the sell-off offers opportunities to buy into them at attractive valuations.