Gary Greenberg, Portfolio Manager
Market and Performance Review
The benchmark MSCI Emerging Markets Index returned 8.77% in January. Both Developed and Emerging market equities saw a healthy rebound from the collapse at the end of the year, boosted by signals from the US Federal Reserve that it would be more patient with further rate rises, as well as a trade ceasefire between the US and China, which is set to last until at least the 1st of March. China outperformed although concerns of a slowdown have not dissipated. Fourth Quarter GDP came in at 6.4%, the lowest level recorded since the global financial crisis. Chinese authorities responded through additional stimulus measures, including the People's Bank of China announcing 100bps cuts in the reserve requirement ratio through January. Conversely, India fell 1.93%, the only market to record a negative return, reversing the gains from December 2018 following results of key state elections.
At the sector level, Consumer Discretionary outperformed and Materials lagged the most.
The Fund underperformed the benchmark index in relative terms over the month. Our overweight India, which underperformed, and stock selection within the country detracted the most. Stock selection in Taiwan helped offset the negative impact from select positions in China and South Africa.
Brazilian stocks, BB Seguridade, an insurance and pension provider, and Notre Dame Intermedica, a health care provider, rose amid positive momentum as the Bolsonaro government began to define its fiscal and pension reform agenda. Sberbank rose, given the constructive valuation, as US sanctions moved to the back burner and the strong dividend story.
Four out of the top five detractors were Indian stocks, including Hero Motorcorp, HDFC Bank, Motherson Sumi and Container Corporations. Investors worried about the forthcoming election, and concerns around the fiscal deficit target for FY19 and FY20. The budget was announced subsequently in February, keeping the fiscal deficit target flat, assuaging concerns of any significant shift to reckless populist measures. Hero Motocorp fell ahead of December quarter results, due to expectations of a weak outcome as two wheeler sales slowed due to external factors including insurance policy changes, a spike in oil prices and liquidity concerns associated with the collapse of a non-banking financial company. The stock has since recovered as the management highlighted an improving trend in January and successful launch of premium scooters. Hero is also perceived as a prime beneficiary of the recently announced support for the farm sector in India. HDFC Bank fell despite strong quarterly results and rising loan growth, while Motherson Sumi fell due to weak end markets in China, Europe and North America.
The team trimmed ICICI Bank, Notre Dame Intermedica and Techtronic Industries following recent moves higher and added to a number of names following recent weakness, including Autohome and NMC Health. The team added to Samsung Electronics given the potential for further dividend increases in H2 2019 and expectation earnings to improve from Q3 2019.
We believe Emerging Markets are broader, and better overall, than the crisis-stricken economies that have dominated the news. We see reasonable growth, low interest rates, and sensible economic policies in most countries in the index, indicating the business environment is more robust than the headlines suggest. Overall, free-cash-flow is solid and rising, and forecast earnings-per-share growth is stronger across Emerging Markets than in the US. In our view, many Emerging Market companies are seeing robust business prospects but are trading at depressed valuations. The highs and lows of 2018 have reaffirmed one of our key convictions: Emerging Markets are not a destination for short-term trades, but for long-term investment in high-quality, sustainable companies. Both All Cap and SMID benchmarks are trading, on consensus estimates, near one standard deviation below their 10 year averages on Price Earnings and Price to Book (Bloomberg).
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.