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The past 12 months have continued to be a volatile period for Emerging Market (EM) equities. In the second half of 2019, investors closely monitored the trade war developments between the US and China, as well as country specific events, such as the social unrest in Hong Kong and Chile. Amidst this uncertainty, the US dollar proved resilient, acting as a headwind to the asset class.
As we entered 2020, sentiment improved somewhat on the back of an apparent resolution of the trade tensions, before coming again under significant pressure due to the spread of the COVID-19 pandemic on a global scale. The sell-off was further exacerbated by a breakdown in discussions between the Organisation of the Petroleum Exporting Countries (OPEC) and Russia, which sent the energy sector into a tailspin, weighing on regional returns in Latin America and EMEA*, home to some of the world’s largest exporters. Against this backdrop, EM recorded their worst quarter since the Global Financial Crisis, with no country or sector posting positive returns. As we progressed into the second quarter, short-lived optimism supported risky assets, driven by a rollback in lockdowns and positive news stories surrounding the development of a vaccine. However, we then also saw a re-ignition in the conflict between the US and China.
Although this has been a tricky period to navigate, this volatility has offered stock-picking opportunities amid periods of indiscriminate selling, enabling us to upgrade the portfolio, buying into good quality names at a discounted price. Overall, we remain cautiously optimistic on the outlook for the asset class. Valuation remain supportive, with EM trading at historical lows vs Developed Markets. More broadly the composition of the EM universe has improved markedly over the last few decades, with many of the largest companies favourably positioned for the long-term and to withstand periods of disruption such as this one. The vastness of the universe also offers diversification benefits and affords investors the ability to navigate away from risks and towards opportunities.
Long-term the case for EM remains intact and will continue to offer many opportunities, supported by structural growth drivers such as urbanisation and lifestyle changes. The rising purchasing power of EM consumers indicates opportunities also in many consumer-related businesses across a range of segments. Within the portfolio, we hold businesses that can capture this trend, such as Zhongsheng Group - a premium auto dealer in China, and Lojas Americanas - a retailer in Brazil. Conversely, an area where we have been more cautious is Financials, reflecting the impact of a low interest rate environment on the profitability of some names in the banking sphere.
In general, the portfolio remains focused on owning high quality businesses with well capitalised balance sheet and sound corporate governance structures. We believe that these are characteristics that can enable companies to weather more challenging economic environments and add significant value for investors over the long-term.
*EMEA - Europe, the Middle east and Africa
