Liontrust Emerging Markets Fund

H1 2020 review

The Liontrust Emerging Markets Fund returned -8.5% over the first half of the year, versus the MSCI Emerging Markets Index’s -3.3% and IA Global Emerging Markets -5.3% return*.

 

The discovery of a novel strain of coronavirus on 31 December in Wuhan, China set the stage for one of the most extraordinary six months in living memory. The issue remained one specific to China in the first months of the year, with the S&P500 hitting fresh all-time highs even in late February, however with the onset of March came the reality that confirmed cases outside of China and neighbouring countries had begun to increase rapidly and that early hopes of containment had proved optimistic. This in turn led – by the end of the first quarter – to almost all major economies suspending business as usual and enforcing degrees of social distancing and stay-home orders to reduce the spread of the virus, with catastrophic economic impacts. Stock markets reacted accordingly with the vast majority of global indices entering bear markets with extraordinary speed. Many Emerging Markets in particular were hit the hardest, exacerbated by currency pressures, with several selling off 40-50% in US dollar terms. However, despite being the epicentre of the virus, China’s aggressive response to the pandemic proved effective, allowing an earlier return towards normality than elsewhere – the stock market responded accordingly and proved extremely defensive in the face of the global panic in equity markets. The pain of the first quarter was further compounded by the collapse in the oil market as Saudi Arabia and Russia abandoned their OPEC+ supply cut agreement and entered into a price war by increasing volumes into an already depressed demand environment. This saw prices plunge dramatically – with some contracts briefly trading at negative prices – compounding the levels of volatility already in the market.

However, the second quarter largely proved to be one of steady recovery from the worst of the panic, with markets frequently appearing at odds with the ongoing stream of concerning economic data and persistence of the coronavirus in several key global markets, most notably the US. Nevertheless, the steady opening up of economies and increase in social mobility attendant to the re-opening of economies – coupled with extraordinary fiscal and monetary response globally – saw markets trending steadily higher, in some cases recovering nearly all of the first quarter’s losses. Markets were also periodically supported by optimism for progress with a vaccine to treat the virus.

All told, the MSCI Emerging Markets Index ended the first half of the year with a 10.7% loss in US$ terms, leaving it mildly behind the developed markets return of -6.6%. Within emerging markets, the large Chinese market in fact posted a (small) positive return of 2.5% for the half, offsetting much deeper losses elsewhere. By region, Latin America was hit the hardest, driven by large currency losses, whilst North Asia in general proved much more resilient. By sector, the story of the half year was undoubtedly the strong outperformance of defensive sectors such as healthcare and telecoms (which posted gains), and also the technology sector, which continued its strong record of performance driven by increased demand for technology services and products during the lockdown period. The large weight of well-performing Chinese internet stocks in the benchmark index went some way to cushioning the overall negative returns of markets over the period.

The Liontrust Emerging Markets Fund was ill-positioned for the events of March and April, having entered the year with a relatively cyclical positioning, expecting a gradual recovery in the global economic cycle as evidenced by recovering PMI indicators, having bottomed in the third quarter of 2019. Whilst maintaining a generally diversified portfolio exposure across both economic recovery and structural growth styles, the Fund’s main country overweight positions were in Russia and Brazil, where we saw both economic recovery, attractive valuations and earnings revisions along side idiosyncratic reform optionality. However, the complete reversal of this economic recovery in short order left the Fund vulnerable to the drawdown that followed. Once the initial period of volatility had passed, the Fund enjoyed improved performance as markets rallied throughout the second quarter, in which the Fund was marginally ahead of the market.

Given the extreme volatility in March and April, we took the view that excessive trading was unwise given the level of dislocation in markets driven by a dollar funding crisis was leading to indiscriminate panic selling. Indeed, the strong recovery from oversold levels seen in the second quarter reveals the rapidity with which losses can be recovered once policy responses are put into effect and incremental newsflow has improved. That said we did take opportunities in March to reduce position sizes in large stock holdings in Brazil and Russia, as well as selling one position in Russia, Globaltrans. The money was recycled into 3 new positions in China in order to reduce the size of that country underweight – online retailer, JD.com, upstream clothing manufacturer Shenzhou International and China Overseas Land, a property stock. In the second quarter, the Fund continued to use the market recovery to incrementally reduce active risk at the country level, in doing so selling three stocks in Brazil (auto parts manufacturer Iochpe Maxion and steel producers Gerdau and Usiminas), as well as the one holding in Indonesia, Bank Rakyat Indonesia. In India, a position in ICICI Bank, our preferred Indian lender was initiated, reducing the scale of the underweight in that country.

We remain optimistic about the outlook for emerging markets over the medium term, with the backdrop supportive in terms of monetary and fiscal support, as well as a significant valuation discount available vs developed markets. Moreover, emerging markets stand to benefit from the continued incremental increase in social mobility as lockdown continues to ease. That said, the current outlook remains unusually uncertain given the precarious current state of the pandemic threat. The three-silo investment process seeks to maintain a balance between economic recovery stocks, steady eddies and hidden fruit (value with catalyst) in order to navigate these uncertain markets by focussing on stock selection rather than strong style bets.

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

 

 

Jun-20

Jun-19

Jun-18

Jun-17

Jun-16

Liontrust Emerging Markets C Acc GBP

-6.5

4.8

12.2

25.1

11.8

MSCI Emerging Markets

-0.5

5.0

6.5

27.4

3.5

IA Global Emerging Markets

-2.9

6.1

3.7

27.5

3.9

Quartile

3

3

1

3

1

 

*Source: Financial Express, as at 30.06.20, total return (net of fees and income reinvested). Non fund-related return data sourced from Bloomberg.

 

**Source: Financial Express, as at 30.06.20, total return (net of fees and income reinvested) primary class.

 

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Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. 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

The information and opinions provided 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. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Thursday, July 16, 2020, 3:28 PM