Pendal Global Emerging Mkts Oppes – WS (BTA0419AU) Report & Performance

This Fund is designed for investors who want the potential for long-term capital growth, diversification across a broad range of global emerging market shares and are prepared to accept high variability of returns. The Fund can invest in shares in a range of emerging markets and may also hold cash.

As manager of the Fund, J O Hambro Capital Management (JOHCM) investment process for global emerging market shares aims to add value through a combination of country allocation as well as individual stock selection. JOHCM’s country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation. The stock selection process focuses on buying quality growth stocks at attractive valuations

This Fund is designed for investors who want the potential for long-term capital growth, diversification across a broad range of global emerging market shares and are prepared to accept high variability of returns. The Fund can invest in shares in a range of emerging markets and may also hold cash. As manager of the Fund, J O Hambro Capital Management (JOHCM) investment process for global emerging market shares aims to add value through a combination of country allocation as well as individual stock selection. JOHCM’s country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation. The stock selection process focuses on buying quality growth stocks at attractive valuations.

This Fund is designed for investors who want the potential for long-term capital growth, diversification across a broad range of global emerging market shares and are prepared to accept high variability of returns. The Fund can invest in shares in a range of emerging markets and may also hold cash.

As manager of the Fund, J O Hambro Capital Management (JOHCM) investment process for global emerging market shares aims to add value through a combination of country allocation as well as individual stock selection. JOHCM’s country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation. The stock selection process focuses on buying quality growth stocks at attractive valuations

The portfolio underperformed over the month with stock selection, primarily in China, weighing on relative returns. Here, the portfolio suffered from not owning the likes of Tencent (we maintain exposure through Naspers), Alibaba, and Meituan. Our holding in Xinyi Solar was also weak. Our Indian names added value although the top performers were Hong Kong Exchanges, Naspers and Prosus.

We have a steadily evolving interest in the traditionally higher-beta emerging markets, seeing domestic recoveries that have a good distance to run based on current trade balances and on the reset to credit and demand cycles that 2020 created. Also supporting those trade balances are some powerful upward moves in terms of trade (the ratio of export prices to import prices) in some of these economies. Of particular note, is India. After the weak economic environment seen in 2019 and then the effects of the Covid-19 lockdowns, India has seen a powerful demand recovery in recent months. PMIs have generally been printing at above 55 and vehicle sales remain strong. The recovery began into the autumn festive season, and companies were unsure if it would last, but it has. In particular, companies are reporting strong demand and a reduced need to fund promotion and associated expenses to generate sales. Driving the recovery has been urban demand (which slowed in 2019 and 2020, even for FMCG companies, but which has revived as Coivd-19 cases continue to fall), premium segments (as disposable incomes and consumer confidence improve), and real estate (helped by lower mortgage rates and improved affordability).

The portfolio outperformed in December with our top-down country allocation calls the main driver of relative returns. Our significant overweight position in South Korea and underweight in China proved particularly beneficial, as did our portfolio void in Alibaba.

As both the country first into the 2020 Covid crisis, and one of the (predominantly Asia-Pacific) countries that has seemed to manage the pandemic well, China was the first emerging market to show economic recovery in mid-2020. At the present time, however, we see some challenges to Chinese equities, and have responded by reducing our weight in the country, especially in the light of some of the highly attractive opportunities we find in other markets.

First of these challenges are the signs of a slowdown in Chinese activity in the last quarter of 2020. The other set of challenges concern politics and policy, both within China and internationally. Domestically, the fallout continues from Alibaba founder Jack Ma’s speech in October in which he criticised Chinese regulators. This has happened at broadly the same time as the US government has been ratcheting up restrictions on US investors investing in Chinese state-owned enterprises, principally by targeting the US secondary listings of such companies.

We had already reduced exposure to US-listed Chinese SOEs in the portfolio in 2020, selling CNOOC, Sinopec and China Mobile. We have further reduced our weighting in China, partly in response to the various concerns highlighted above, and also partly in response to the much better macro environments we find in some other emerging markets.

The portfolio performed somewhat in-line with the benchmark over the month. Our underweight in China and overweight in South Korea added value, as did our Indian holdings. In China, our portfolio void in Alibaba was helpful after the suspension of Ant Financial’s highly anticipated IPO. Although stock selection effects were modestly positive, some of our non-benchmark holdings, namely Barrick Gold, weighed on returns. Barrick Gold was the main laggard as the gold price dipped on the back of more risk-on sentiment as positive vaccine data boosted optimism.

Much of the commentary around the impact of the coronavirus on economies around the world has emphasised the unprecedented nature of the crisis. The outcome, though, is in some senses not new to emerging markets. Sudden, brutal hard stops in domestic consumption and activity, accompanied by capital flight and spectacular correlated sell-offs in equities and currencies, have been a sporadic feature of the asset class since at least the Latin American debt crisis of the early 1980s. That pattern allows us to look for signs as to which economies (and, potentially, markets) are in the best positions to recover.

There are particular indicators that, in our experience, show an economy at least has the foundations of a recovery in place, although history suggests it is usually worth looking for positive momentum in economic indicators and corporate results/expectations as well. Looking at these indicators, two markets stand out as particularly interesting right now: India and South Africa.