Global Emerging Markets Equity Fund quarterly feedback

By Nedgroup Investments

Ian Beattie of NS Partners, Fund Manager of the Nedgroup Investments Global Emerging Markets Equity Fund, provides an overview of the Fund’s performance for the last quarter and its positioning going forward.

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Q3 Fund performance overview
The portfolio returned 9.7% over the period, just ahead of the MSCI Emerging Market Index (9.56%), bringing the year to date return to a positive 2.93%. One-year performance was up 16.31% compared to the Index, which was up 10.5%.

Excellent security stock selection in China, Russia and Taiwan worked for the Fund in Q3. We were overweight in China consumer discretionary and IT names in Taiwan and China and underweight in energy, utilities and healthcare. Our stock selection was negative in India and Indonesia. We had positive performance from Longi Green Energy, the largest manufacturer of solar energy systems, LG Chemical, a fast-growing EV battery markert and Reliance Industries, an Indian energy, communication and retail giant who is the leader in all major business segments it occupies. Q3 detractors included Wynn Macau, a gaming operator that we bought in anticipation of a recovery in Chinese visitors, Banco Bradesco, a Brazilian domestic bank that was impacted by conservative positioning for non-performing loans, but which we expect to reverse as the recovery comes through and the Minth Group, an automobile group that provides EV battery casings to European original manufacturers.

Over the quarter, we started taking profits in the high growth consumer, internet IT and media names and started adding economically sensitive names in China, Korea, Taiwan, Brazil and Mexico.

Brazil, Mexico and South Africa all did very poorly during Q3, with the Fund underweight in all three countries. China has been good for everybody and is experiencing a V-shape recovery with earnings starting to come through. India didn’t do as badly as was expected and Taiwan continues to do very well with the Fund taking some profits from that market in the quarter. Taiwan has some great companies to choose from and we’re rotating some stocks in that market.

Sector performance
Energy remains at the bottom with consumer discretionary, especially if it’s internet related, at the top. Textiles in the sports and leisure wear arena have done well, e.g. Nike in the US and Adidas in Europe and Li-Ning in China. Many of these have been solid names in our portfolio for some time. Sectors that were not sensitive to the COVID-19 shutdowns and which had strong internal growth drivers outperformed significantly. Utilities are still doing very well, so it’s not just defensives that are being fuelled by all the liquidity.

The top five Fund contributors were Longi Green Energy Technology (IT) with an end active weight of 1.34%, LG Chemical (materials) at 0.69%, Reliance Industries (energy) at 1.73%, ESR Cayman Ltd (manager of real estate investment trusts specializing ibn e-commerce shedslogistics) at 1.20% and Naver Corp (communication services) on 0.75%.

The bottom five detractors were JD.com, Minth Group, Itau Unibanco Holding, Banco Bradesco and Wynn Macau. We are not looking to sell any of these names as they all have strong business models and good cash flow generating ability and should come back very strongly.

Top transactions in Q3
The Fund’s top five purchases were Airtac International Group in Taiwan with a weighting of 1.27%. This company was helped by a pick-up in China PMIs, increased automation and the bottoming of the industrial cycle. We bought JD.com Inc from China now 1.19% of the Fund. Spring Airlines Co Ltd is a low cost carrier in China and is 1.16% of the Fund. Taiwan Semiconductor Manufacturing is a world-class chip maker that benefits from growth drivers in IT and telecom and is 1.16% of the Fund. Powerlong Real Estate Holdings accounts for 1.05% of the portfolio. It is enjoying better sales momentum than its peers and is a beneficiary of Southbound Hong Kong Connect.
 
With regard to Q3 sales, there was a lot of profit taking, firstly with Giant Manufacturing (Taiwan), a bike and E-bike manufacturer. We also sold positions in Largan Precision, an IT company that was unable to offset the loss in Huawei orders and Tencent where we’ve not only taken good profits but have moved capital away from growth areas rotating into the more economically sensitive areas, especially in China. LG Household & Health Care had its profits significantly impacted by lack of tourism and we sold this stock early on in the lockdown. Baidu Inc was another sale where the company had not executed as well as we hoped.

Global economic overview
If you add you look at both the G7 and E7 numbers together it looks appears like  that we’re getting a V-shape recovery. The money growth surge suggests a strong economy in 2021 with pricing pressure in the medium term in certain areas, which will look like an upswing in medium-term inflation. This is a three quarter turnaround compared to the Global Financial Crisis, which took three years so this has been a very different recovery. The huge policy response saw nominal GDP collapsing with narrow and broad money surging. These numbers are the highest we’ve seen historically.

The Chinese economy has led the way both down and up. Growth pick-up is extending to services/consumption and it’s much easier for companies to get financing. Industrial profits have already bounced.

The money supply in other emerging markets is huge, but we’re a little nervous about Brazil.

EM checklist
It’s been many years since our EM checklist (E7 above G7 real money growth, low absolute valuations, above DM earnings revision ratio, an upswing in global industrial cycle, positive real money, upswing in commodity prices, falling USD) has looked this positive. Real money growth is the only one in the red as both E7 and G7 are strong but the G7, led by the Fed, is higher. So our system says it’s still negative for emerging markets.

Portfolio strategy
We will remain overweight in IT, internet and consumer discretionary and will add economically sensitive stocks and markets as the liquidity gap reduces and the economy recovers. We are overweight in China, but will be adding South Korea and Brazil. We remain underweight in Taiwan, South Africa, Mexico and GCC markets. Our focus remains on high quality and high and improving return on invested capital companies of which there are plenty in mainland China. We are looking for opportunities in quality and quality growth stocks and are preparing to play recovery through economically sensitive stocks and countries.