Ian Beattie, Co-CIO at NS Partners, the portfolio managers for the Nedgroup Investments Global Emerging Markets Equity Fund, provides an update of the Fund over the last quarter.
We are seeing unprecedented fiscal and monetary stimulus, which we believe will drive a strong recovery in the second half of this year and the first half of 2021. Unprecedented levels of liquidity are surging through the markets and causing distortions and, based on the data, we believe a very strong recovery is certainly on the cards. Given the liquidity in the markets, equity markets will discount return to growth and we are more optimistic about emerging markets than we have been for many years. A number of indicators that we look at are flashing positive or neutral with the Dollar being a key indicator.
Up until now, we’ve been positioned for liquidity and made sure we bought the growth internet and tech names that will benefit from this and who will also be winners in the long term. We’re looking at both a new world ahead and economic growth starting again. We are therefore assembling more economically sensitive positions and are looking for opportunities in quality growth companies. We’ve taken the opportunity to buy some good quality names that have been unfairly sold and are now looking further afield for where the earnings surprises may come through. We are still overweight IT, internet and consumer discretionary. We reduced our staples and defensives in Q2. We were overweight China and Taiwan and are reducing those in favour of South Korea and Brazil. We remain underweight in India, South Africa, Mexico and GCC markets. We remain focused on high quality and high return on capital companies and there are plenty of these in China. As a result of China’s focus on keeping supply chains closer and the changes in capital markets, we’re seeing a lot of ADRs re-listing in Honk Kong, making us more optimistic about Hong Kong than we have been for a long time.
Real money is soaring while industrial output is collapsing as large parts of the world have been locked down and, just as China starts to open, the US is still closing down as they get more pockets of infections. Broad money is also soaring. This is an important number as a measure of how much is moving through the banking system. Broad money did not really accelerate with quantitative easing after the GFC, but it is accelerating now, so we’re going to get something very different, which does raise the possibility of a reflationary doom this time. If this broad money does get turned into loan growth, as is happening in certain jurisdictions, then there’s going to be inflation risk. If that happens, where will investors get their inflation hedge money from?
The China manufacturing PMIs are looking V-shaped with industrial profits already bouncing back. China is obviously a lot further ahead in the COVID cycle than the rest of the world despite dealing with natural disasters not seen in China for many decades. In terms of liquidity, China has been more modest than other countries, being the last of the orthodox central bankers. Real narrow money is also surging in emerging markets.
EM outlook checklist
The EM checklist (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), what we look at as an indicator for being in emerging markets, is more bullish than it has been for years. The only ‘red’ indicator is that real money growth is not above G7 real money growth. This is because no one is printing money faster than the US Fed. The US Dollar is interwoven with all these key indicators. We believe the Dollar is rolling over because the Fed has made sure that there is no Dollar shortage.
Year to date, the portfolio is still down in Dollar terms at -7.4% bringing the since inception performance (April 2019) to just positive at 0.7%. The MSCI Emerging Markets index is down 9.8% year to date and down 4.4% since inception. Our peers, according to the EAA Fund Global Emerging Markets Equity index, are down 10.7% year to date and -4.9% since inception. We’re very excited about what the markets are showing us at the moment and the opportunities that are presenting themselves.
Q2 Fund overview
The Fund returned 20.29% in Q2. Security selection in China and Taiwan in IT names worked well for us, with communication services and industrials all adding to performance. Security selection in Russia, Poland and Greece was also very positive as was being underweight in the Gulf markets. Stock selection in Brazil and India was poor with our leisure names in India. We were also underweight in South Africa, which didn’t help as some of the big names in the SA index rallied.
Top performers included Mediatek (microchip design company addressing 5G and data management systems) who has been a great company for us and has benefitted from the geopolitical tensions as Chinese firms shift towards Asian firms rather than US. CD Projects (Polish computer gaming developer) has been a very profitable trade for us over the last few years and we finally finished selling it this week. 21 Vianet (US listed Chinese datacentre provider) also did well for us over the quarter.
Poor performance came from Conche Cement although we think they will do really well repairing the damage from the terrible rains that have hit China lately and we have a lot of confidence in them. They are highly cash generative with high return on capital and leading market share. Guangdong Capital (water utility) did not do well having no catalyst at the moment.
Q2 changes included reducing Taiwan where we took some profit and reducing China H shares and Mexico. We added to Brazil, India and China A shares. We also increased industrial exposure in China to overweight. We did take some profit in some select consumer staples, IT and media.