Quarterly Commentaries

Emerging Markets Equity Strategy 3Q 2018

10.16.2018

Key Takeaways

 
  • In the third quarter of 2018, our Emerging Markets Equity strategy underperformed the MSCI Emerging Markets Index. Emerging markets came under pressure again, with the MSCI EM Index declining 1.09%.
  • Global trade frictions, tighter Federal Reserve monetary policy, a rising U.S. dollar and higher oil prices drove assets away from riskier countries. Many emerging market currencies sold off, with Turkey, Argentina and South Africa among the hardest hit.
  • Our underperformance was largely due to energy, the best-performing sector in the Index (up 14% in USD terms), where the strategy is underweight. Oil prices have continued to rise alongside supply constraints on Iran. We are typically underweight commodity businesses, as their earnings tend to be volatile and unpredictable. Short-term weakness in our long-standing Indian financials holdings also weighed on relative returns. On the positive side, earnings across our portfolio continue to show healthy growth, and our Mexican holdings performed well following the presidential election in July.
  • In our view, the issues plaguing emerging markets today are neither as widespread nor as damaging to long-term potential as many market observers might suggest. While Chinese economic activity may slow, we see the current turbulent environment as another headwind in a decades-long pathway of growth. Our focus remains primarily on companies with sustainable earnings, which can grow even in times of political and market turmoil.
  • We remind our clients and partners of the historic volatility of emerging markets, and the difficulty in timing them. Alarmist headlines tend to lift risk perceptions, often well beyond reality. With such volatility, exiting the market even for short periods can sharply impact long-term returns – giving away the value of accumulated earnings growth in weak markets. Once the dust settles, investors with a long-term perspective and fortitude to stay in the game should benefit from the growth in the portfolio’s underlying earnings.

Trailing Returns: Emerging Markets Equity Composite(As of 09.30.2018)

Calendar Year Returns

Source: NorthernTrust
All results portrayed are expressed in U.S. dollars. Periods under one year are not annualized.
Past performance is not necessarily indicative of future results. For full disclosure and for further information regarding comparison to an index, see the Disclaimer and Performance Disclosure.

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