Legg Mason Martin Currie Emerging Mkts (ETL0201AU) Report & Performance

The Fund gained 3.67% over the month of July. Within the Fund, two notable positive contributors included Brazilian-based Cosan and Mexican Banking services company Banorte. Cosan is an industrial holding company providing diverse exposure to the country’s energy, agriculture and mining industries. It has continued to perform well, having posted solid quarterly results in May and sentiment has continued to improve around its outlook and long-term opportunities. Elsewhere, Banorte delivered a decent set of results during July. Management also increased net income guidance for the full year, based on higher loan growth and the benefits from an improving macroeconomic backdrop.

On the other side, Samsung Electronics was weaker during the month. Preliminary results released in July were slightly below expectations at the revenue level, however operating profits were above. Sentiment remains for a recovery in the second half of 2023 and the long-term investment thesis is supported.

Finally, Indian financial HDFC Bank delivered its first quarter results over the period. Despite delivering strong growth in profitability, slightly slower loan growth weighed on investor sentiment. Asset quality remains high and management delivered a confident message on its ability to continue to drive deposit growth in line with guidance.

Also during July the Fund received shares in JIO Financials Services (JIO). Reliance Industries had previously announced plans to demerge JIO which will eventually become a publicly listed entity. It was subsequently announced that existing shareholders of Reliance Industries would receive one share of JIO for every share they own in Reliance Industries.

The Fund gained 1.31% over the month of June. Within the Fund, positives over June included Brazilian-based Cosan. It reported solid quarterly results, led by its businesses Compass and Moove. HDFC Bank – the Indian banking and financial services company is in the process of merging with the mortgage provider, HDFC Ltd. The deal is scheduled to complete during July. Ahead of this, management at HDFC Bank has been reinforcing a positive outlook for growth, profitability and sales synergies from the merged entity. While Brazilian-based B3 reported solid operating figures with average daily trading volumes recovering month-on-month in May (reported in June). Additionally, B3 is likely to benefit from sentiment around interest rate cuts in Brazil, which should boost trading activity.

On the other side, Bank Rakyat, despite delivering solid results for the first five months of the year (reported in June), Indonesia’s largest bank was weaker during June. It was likely to have been affected by a slightly weaker market backdrop in Indonesia, which was amongst the weaker regions in emerging markets during the period. LG Chemical remained out of favour amid downgrades to near-term petrochemical demand as China’s economic manufacturing recovery is proving weaker than expected. While Globalwafers suffered as expectations of a demand recovery were pushed out. This is a consequence of supply discipline from key chipproducing customers who have cut production, particularly in response to weak memory chip pricing.

In June, the Fund purchased Bank Negara Indonesia (BNI). The company has a well-communicated plan around improving its returns profile, with targets in place for 2025. This will bring it up to the level of the other largest banks in Indonesia. The plan is based around fee contribution, cost/income, cost of risk and net interest margin. It is not based on a change to lending mix, so BNI will remain a predominantly corporate bank. We have engaged with the company and gained further comfort around the robustness of its plan and the sustainability of the outcome. We do not think this is being fully appreciated by the market.

Emerging markets started the year with a second consecutive quarter of positive performance. Inflation concerns continued to impact the global economy, and the U.S. Federal Reserve increased rates by 0.25% in both February and March. There was disruption in the financial sector due to the collapse of Silicon Valley Bank and the subsequent demise of Credit Suisse. However, fears of contagion decreased towards quarterend, and emerging markets overall saw limited impact. The U.S. dollar weakened slightly versus emerging market (EM) currencies as a group.

At the market level, Mexico, Korea and Taiwan all delivered strong performance over the period. In Mexico, data points showed positive economic growth for January and February, and robust employment growth. Both Korea and Taiwan have a high exposure to the semiconductor space, where sentiment has improved with the focus on 2024 and long-term revenue recovery driven by an increase in demand for artificial intelligence chips, and stabilisation of demand in key areas such as smartphones. China also had another positive quarter, with its efforts around re-opening its economy contributing to stronger economic growth. However, India was weaker, with equity markets affected by sentiment-led profit taking.

Additionally, market reaction to controversy facing the Adani Group led to some volatility. However, there was no material change to earnings expectations, and in the Indian financials space there continues to be positive earnings revisions. Brazil was also weaker during the month with concerns over the direction of fiscal policy continuing.

The Fund was down 6.53% over the month of September.

At an index level, consumer staples were the strongest sector during the month, while Mexico was strongest from a country perspective

For relative performance within the Fund, financials were the strongest contributor, while Mexico was additive at the country level.

At the stock level, WEG was one of the top contributors to performance in September. WEG saw positive earnings momentum following an announcement from management around its next three years capital investment plan that will see a significant expansion to its production capacity with a new project in electric mobility motors. Bank Rakyat Indonesia saw strength during September underpinned by positive domestic sentiment, where prudent central bank policy has also helped support performance. Finally, Titan was a top contributor during September, supported by positive macro data in India. Following the release of its second quarter results at the end of August, Titan continued to generate positive momentum as the delivery of higher-than-expected margins and upgraded guidance for continued strong growth was received well by the market.

On the other side, at an index level, information technology was the weakest performing sector, while Korea struggled.

In relative performance terms, information technology was the largest drag, while at a country level China was detractive.

At the stock level, GlobalWafers, TSMC and Samsung Electronics were the key detractors of performance. All three names are core players within the global semiconductor industry. This has been a more challenging area of the market for some time and saw further pressures in September following the release of the US CHIPS Act. At a stock specific level, speaking at an industry conference GlobalWafers indicated that although the longer-term outlook remained positive, a recovery was unlikely before 2023. This sentiment was echoed by industry peers.

There were no new purchases or outright sales within the Fund in September.

The Fund was up 1.78% over the month of August.
At an index level, energy was the strongest sector during the month, while Brazil was strong among larger countries.
For relative performance within our Fund, consumer discretionary was the strongest contributor, while India was additive at the country level.

At the stock level, EPAM saw strength following a positive reception to its quarterly results (having previously withdrawn Q1 and FY22 guidance due to uncertainties relating to the events in Ukraine). Both ICICI Bank and Titan continued to be top contributors to performance during August, supported by the positive macro data in India. ICICI was further supported by continued positive sentiment following Q1 results posted the previous month, which demonstrate that it can deliver best-in-class profitability and growth metrics (which has not always been the case historically). Titan followed its strong July sales figures with its full quarterly results being posted in August. A combination of higher-than-expected margins and guidance for continued strong growth helped performance.

On the other side, at an index level, information technology was the weakest performing sector, while Mexico struggled.
In relative performance terms, industrials were the largest drag, while at a country level our Korea was detractive.

At the stock level, Samsung Electronics fell on the news of continued fiscal tightening by the US and Korea, giving back some of its gains from July during August. Xinyi Solar underperformed the market despite announcing H1 results in line with expectations – the market reacted negatively to its relatively weak margins in the core solar glass business. Polysilicon (a key material in solar glass) prices remain high and are a bottleneck for solar and solar glass demand where the global outlook is strengthening. Meanwhile, CATL detracted from performance despite a headline beat on Q2 earnings which was driven by strong sales and a recovery in gross profit margin. Its underperformance on these results is likely because the margin improvement was driven by what has been considered a non-core part of its operations.

There were no new purchases or outright sales made within the Fund over the month of August.

The Fund was down 0.28% over the month of July considerably outperforming the index. At the stock level, Titan posted good results exhibiting strong business mix growth across all of its retail products and channels (bullion, jewellery, watches, eyewear). Consumption recovery is being driven by growth out of Tier 2/Tier 3 cities and new store openings for Titan. ICICI Bank outperformed the market amidst a positive macro-outlook in India with lower commodity prices as some investors had been concerned about higher inflation. The company posted strong results, demonstrating best-in-class fundamentals and extremely strong loan growth and pre-provision operating profit. Meanwhile, Samsung Electronics benefited from the recovery in semiconductor stocks globally.

On the other side, Tencent was impacted by the news that Prosus (which is an investor in Tencent) would be allowed to sell shares in the open market. The gaming business has seen some stabilisation but not growth recovery as investors wait for regulatory approvals for new games. It was also impacted by negative sentiment in the regulatory space. Alibaba announced an application for a dual primary listing in Hong Kong which should alleviate fears behind US de-listing. The stock was negatively impacted by rumours surrounding Ant financial and the general trend of muted online spending and consumption activity post-Covid reopening. Meanwhile, China Merchants Bank was negatively impacted by broader Chinese bank weakness following the news of a mortgage payment suspension for the sector. This was exacerbated by weak property market sales data being published.