Liontrust Emerging Markets Fund Q3 2021 review | Insights

Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.

The Liontrust Emerging Markets Fund returned -3.4% over the third quarter, versus the IA Global Emerging Markets sector average and MSCI Emerging Markets Index’s respective gains of -4.7% and -5.8%*.

Emerging markets’ somewhat troubled year continued in the third quarter, with the benchmark MSCI Emerging Markets Index falling -5.8%, outpacing mild declines in developed markets. The primary reason for the sell-off was centred on China and the active prosecution of the goals of “common prosperity”. Common prosperity acts as an umbrella term for policies aimed at implementing tighter regulation over a number of sectors in the service economy − ranging from ride-hailing apps to online gaming and education providers. The policies aim to foster a more equal society by creating the conditions for further household income growth, better public services and a stronger social safety net. The application of these principles have been seen in multiple sectors this year and July saw private education companies in line for scrutiny, with the sector being described as having been “hijacked by capital”. Regulations banned companies teaching school curriculums from making profits, raising capital or going public. Whilst these regulatory interventions have been extremely painful for the performance of the relevant shares, a wider question has also been haunting the Chinese equity market − namely which sector is next. Given this degree of uncertainty, China was one of the worst performing markets over the quarter, falling -16.2%.

Moving almost in counterpoint to the negative news in China was the continued strong performance of India, where the post-pandemic recovery continues apace, with increasing evidence of green shoots of a private sector investment cycle, catalysed by the property market, where a lack of inventory and all-time high affordability levels are revitalising a sector that has been digesting oversupply for almost a decade. With this promising backdrop India significantly outperformed over the quarter, returning 15.3%. Russia was another key market that bucked the negative trend, being a prime beneficiary of the ratcheting up of global gas and oil prices. Russia also benefits from its secure external position in an environment of rising rates given its low debt profile and current account surplus.

The Liontrust Emerging Markets Fund outperformed the benchmark index over the quarter, returning -3.4%. The key areas of outperformance came from Indian stocks − both through an overweight allocation to this market, but more importantly through stock selection. In particular, the Fund’s exposure to the resurgent property sector through Godrej Properties performed well, alongside positions in materials, healthcare, financials and energy. The Fund also benefited from relatively low exposure to the poorly performing Chinese market − in particular underweight positions in the under-fire e-commerce and internet sectors. The Fund’s Russian holdings − state lender Sberbank and private gas producer Novatek also enjoyed strong returns over the quarter. Offsetting this, performance was held back by technology exposure in both South Korea and Taiwan given the weakening outlook for the sector, in particular the memory chip market.

Over the quarter, the Fund added positions in 3 Indian stocks − namely infrastructure conglomerate Larsen & Toubro, a beneficiary of a pick-up in both public and private sector investment, chemical and fertiliser producer Chemplast Sanmar and medical diagnostics and service provider Krishna Medical Institute. Further additions were made in Korean battery technology company Samsung SDI and Chinese sportswear retailer Li Ning − a beneficiary of the ongoing policy push for a healthy and prosperous middle class in China. Sales were made in stocks where the deteriorating outlook in China had an outsized impact on earnings potential, namely Korean cosmetics retailer Amorepacific and Naspers (effectively a holding company deriving it’s value from China’s Tencent).

Whilst China has been under considerable pressure over the quarter, we do see plenty of potential for policy relaxation both in the under-pressure property market, and also through an easing in the regulatory news flow on the internet and e-commerce sectors. This could give emerging markets a much needed respite in the final quarter, seasonally a strong one for China, commodities and the emerging markets complex in general. The Fund remains underweight the China market, but we would be wary of being too negative of the market at these levels. We see opportunities emerging in the recently overlooked ASEAN markets, where low vaccination levels have led to longer-than-average lockdowns, yet there is now light at the end of the tunnel, leaving potential for significant improvement in economic growth and earnings in these markets. Although the Indian market now trades at elevated valuations, we firmly believe that over the longer term this remains one of the most exciting markets in emerging markets and thus retain our exposure to stocks that will benefit from the accelerating investment there.

Discrete years' performance (%)**, to previous quarter-end:

	Sep-21	Sep-20	Sep-19	Sep-18	Sep-17
Liontrust Emerging Markets C Acc GBP	15.5	1.6	5.3	-2.1	21.4
MSCI Emerging Markets	13.3	5.4	3.7	2.0	18.6
IA Global Emerging Markets	17.0	2.0	6.5	-1.5	17.4
Quartile	3	3	3	3	2

*Source: FE Analytics as at 30.09.21

**Source: FE Analytics as at 30.09.21. Quartile generated on 06.10.21.

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Key Risks

Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

Investment in funds managed by the Global Equity (GE) team may involve investment in smaller companies - these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.

Disclaimer

This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.

This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust. Always research your own investments and if you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.