Liontrust Emerging Markets Fund

Q1 2020 review

The Liontrust Emerging Markets Fund returned -22.9% over the first quarter, versus the IA Global Emerging Markets sector average and MSCI Emerging Markets Index’s respective gains of -21.2% and -18.4%.

 

The first quarter of 2020 was one of the most extraordinary in recent times, with the global economy and stock markets suffering a collective blow unprecedented in living memory. Although the detection of a novel strain of coronavirus was made on 31 December in Wuhan, China, the issue remained one specific to China during the first half of the period, 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. By the end of the month, almost all major economies had suspended business as usual and had enforced various degrees of social distancing and stay-home orders to reduce the spread of the virus. The effects of these dramatic measures have already been revealed acutely in economic data, and although at the time of writing there are some tentative signs that confirmed cases and deaths are responding to these measures in certain key European countries − in particular Italy − there remains a huge degree of uncertainty over both the longevity and severity of the preventative measures and therefore of the overall economic toll of the global pandemic.

Needless to say, stock markets reacted extremely negatively to the developments, with almost all major global indices entering bear markets with extraordinary speed. Because of the global impact of the pandemic, losses were felt across markets and whilst emerging markets as a whole did indeed underperform developed markets, they did not do so by the degree normally associated with such powerful drawdowns. However, a significant part of this performance was due to the notable outperformance of the Chinese market due to a much earlier emergence from lockdown, and also the perception that the Chinese government has sufficient fiscal and monetary levers to effect economic recovery throughout the rest of the year. Elsewhere outside Asia, most emerging markets were hit considerably harder, so whilst China fell only -10.3%, several emerging markets sold off -40-50% in dollar terms. The sell-off was of course compounded by the decision of Saudi Arabia and Russia to abandon their OPEC+ supply cut agreement and effectively enter into a price war by increasing volumes into an already depressed demand environment. This saw the oil price collapse to $22.5 per barrel by quarter end, putting huge pressure on oil and commodity linked currencies such as the Russian ruble and Brazilian real. 

The Liontrust Emerging Markets Fund had entered the year with a relatively cyclical positioning, seeing a gradually recovering global economic cycle as illustrated in 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 and idiosyncratic reform optionality. However, the complete reversal of this economic recovery in short order left the Fund vulnerable to the drawdown that followed. The underperformance can be almost exclusively explained by the significant underperformance of these two markets. 

Given the extreme volatility, we took the view that excessive trading was unwise, given that a sudden dollar funding crisis was leading to indiscriminate panic selling. Indeed, the strong recovery from oversold levels seen at the end of the quarter and into April reveals the rapidity with which losses can be recovered once policy responses have been announced and the incremental news flow on the virus has eased. That said, we did take opportunities in March to reduce position sizes in large stock holdings in both Russia and Brazil, as well as exiting our lowest conviction Russian holding, Globaltrans. Some of this money was recycled into 3 new positions in China in order to reduce the size of that country underweight − the new positions were online retailer JD.com, upstream clothing manufacturer Shenzhou International and China Overseas Land, a property stock. 

Whilst the coronavirus has had an enormous shock on emerging markets and indeed the wider global economy, it is also true that emerging markets as a whole went into this crisis vastly better prepared than in previous crises, with a large range of monetary and fiscal tools at their disposal − indeed we have already seen these deployed with impressive speed. Moreover, unlike the Global Financial Crisis − Emerging Markets entered into this crisis on a significant valuation discount to developed markets, reflecting a long period of poor relative returns and investor disinterest, which we believe leaves emerging markets well positioned to rebound strongly during the inevitable global recovery supported by fiscal and monetary policy already in effect. That said of course, this cannot happen until a clear exit path from the current shutdown has become clear, therefore we anticipate continued volatility in the coming quarter, and therefore have also kept a larger than usual cash position of 5% as a result. 

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

 

 

Mar-20

Mar-19

Mar-18

Mar-17

Mar-16

Liontrust Emerging Markets C Acc GBP

-16.2

-4.8

13.5

49.5

-11.9

MSCI Emerging Markets

-13.5

-0.3

11.4

34.7

-9.1

IA Global Emerging Markets

-15.4

-1.5

8.5

35.3

-9.2

Quartile

3

4

1

1

4

 

*Source: FE Analytics as at 31.03.20

 

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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, April 23, 2020, 2:56 PM