Ian Beattie from NS Partners, the Portfolio Manager of the Nedgroup Investments Global Emerging Markets Equity Fund, has been investing in emerging markets for 25 years and will address ‘emerging markets – we’ve only just begun’.
Q4 Fund performance overview
The portfolio was up 25.8% for 2020, 7.5% ahead of the benchmark. The since inception performance for the Fund was up 36.8%, which is 12.4% ahead of the benchmark. Things that worked for the Fund in 2020 included good stock selection in China, Taiwan, S Korea, Russia, Greece and Poland. Sector wise, it was industrials, IT, communication services and financials. If you didn’t get some of those sectors right last year you were in trouble. We had poor stock selection in India, Thailand and Brazil, all of which were Covid-related with two being in travel and tourism stocks.
The stand-out performers were Contemporary Amperex Tech and LG Chemical, both battery makers in a sector that is oligopolizing. Sany Heavy Industry has been another big winner. They’re a leading Chinese heavy construction equipment company. Travel and tourism were the losers despite very good bounces in Q4. Lemon Tree Hotels, which cost us is cutting costs even more. Good companies come out of crises stronger than ever with lower costs and fewer competitors.
In Q2, our liquidity analysis showed us that a bull market was starting as the markets collapsed and the economy stopped dead. In Q3, we saw the liquidity move into the economy away from financial markets and we saw the Chinese economy experience an amazing V-shape recovery. So, we started to buy the economically sensitive names or cyclicals. We even picked up some low-cost, intraregional airlines with good business models. That meant reducing China even though we like it – we think the economy is losing momentum and that we can buy better later. India wasn’t the disaster everyone predicted, so we added to that. Taiwan has been amazing with the best Covid response and also great companies. We saw great performances from China, Taiwan and Vietnam in 2020 with huge export increases. We added a bit to Mexico for some copper exposure. We added to S Korea, which is a very cyclical market and did well, but didn’t get enough.
Attribution by country and sector
We had good stock selection in all regions, especially China and Taiwan. But, in 2020 you needed to have the right type of stocks or sectors with high duration, returns on capital that wouldn’t be downgraded, lack of economic sensitivity and then later in 2020, you needed operational leverage. It was all about technology and internet at the right time. We saw a huge outperformance in consumer discretionary, which then retreated followed by the rally in materials.
The top five contributors were Contemporary Amperex Technology (industrials), LG Chemical (materials), Dada Nexus Ltd (consumer discretionary), Sany Heavy Industry Co Ltd (industrials) and Longi Green Energy Technology (IT). The size of the moves were very large, making big contributions to performance. We have reduced most of these big winners already, but not sold them completely.
The losers included a stock we did not own, Nio, which is the Chinese Tesla. The others were in tourism or were consumer players affected by Covid, namely Minor International, Wynn Macau, Lojas Renner SA and Lemon Tree hotels.
Top transactions in Q4
At the end of Q3/4, we started buying companies with operational gearing. We added to financials after a long period of pandemic-related underperformance with ICICI Bank Ltd in India with a weighting of 1.53%. We increased economically sensitive names in a cyclically sensitive market through Kasikorn Bank PCL (1.20%). We bought Glodon Co Ltd (0.90%), a software service provider to the construction industry in China that is set to benefit from recovery in activity in construction management. We bought Budweiser Brewing Co Apac Ltd (0.89%), a premiumisation story in Asia with low levels of market penetration for premium brands with unusually low levels of debt and strong growth potential as the pandemic impact recedes. Our final purchase was Semen Gresik (Persero) PT (0.81%), an Indonesian cement producer in one of the most economically sensitive markets in the region. Indonesia is a beneficiary of recovering commodity markets globally.
We sold the extreme liquidity sensitive names and the high beta names. We sold positions in Hong Kong Exchanges and Clearing Ltd Profit taking profit and reducing our exposure to a business that is likely to face headwinds as monetary conditions become less supportive for trading volumes and IPO’s. We sold Joyoung Co Ltd as the competitive environment became more aggressive for small electrical goods and sold Jd.Com Inc to reduce our exposure to e-commerce retail following an unbelievably strong year in 2020. We sold Bancolombia, reducing our exposure to Colombia as the monetary aggregates in the country weakened and added to Brazil. We sold Hon Hai Precision Industry to reduce our exposure in IT and increase our exposure to Industrials.
The huge money supply growth, which powered markets is now going into the economy. The economy is now soaring. This liquidity is being sucked into the system with inventories having to be rebuilt very quickly. We’re seeing huge shortages in many unusual places. We need to find the pricing power and the pinch points because it’s radically different this time. These price rises are being accommodated by the central banks, so there will be some inflation in unusual and different places. Broad money is growing and it’s feeding through already.
The global V-shaped recovery is continuing to unfold, virus acceleration notwithstanding. There’s an inflation rebound ahead, but central banks will remain ultra-loose. Global money growth is still high, but temporarily below the surging industrial output growth with some possible near-term drag on markets as a result of that. There are some short-term reasons for concern with excess money ‘air pocket’ as short-term PMIs peak out. Any weakness in cyclical assets are a buying opportunity. On a 1-year view, it’s a very favourable environment for emerging markets, for “old economy” cyclical sectors and commodity prices. Watch out for the pricing power and the bottlenecks. They are in many new places. They’re accommodated by central banks, but we have to go and find them.