Quarterly Commentaries

Emerging Markets Equity Strategy 2Q 2018


Key Takeaways

  • In the second quarter of 2018, our Emerging Markets Equity Strategy posted a negative return but outperformed the MSCI Emerging Markets Index. The benchmark is now in negative territory for the year, following a 37% gain in in 2017, its best performance in eight years. All sectors of the MSCI EM Index posted negative returns for the quarter.
  • The quarter was marked by a sentiment shift to risk-off. The markets finally reacted to a number of challenges, including accelerating U.S. inflation bringing the prospect of more (and quicker than previously expected) rate rises, sustained higher oil prices, and China posturing to go toe to toe with the U.S. on trade.
  • Negative sentiment shook both EM markets and EM currencies. The Brazilian real and the South African rand fell by 14% against the U.S. dollar, alongside a 5% depreciation in the Chinese renminbi. Turkey and Brazil (which endured a nationwide trucker strike), were the weakest markets, both falling around 26% in dollar terms.
  • The portfolio’s outperformance was supported by our holdings in India (our largest country exposure) and Korea. Our overweight exposure to Brazil, however, worked against relative performance, with even the powerful brewer AmBev, a huge cash-flow generator, taking a hard knock. Our longstanding underweight to the energy sector also detracted from relative performance this quarter.
  • While we believe the markets are rightly volatile following a euphoric run, we do not see them facing the contagion risks we saw in the 1990s. In fact, we believe the big picture for emerging markets looks rather good. Southeast Asia, in particular, continues to offer solid growth drivers supported by stable, positive fiscal and current account balances. We continually look to buy quality franchises opportunistically when stock prices dislocate from what we regard as fair intrinsic value in volatile markets. We have confidence that our portfolio of high quality growth companies can outperform through recessions and shock periods.

Trailing Returns: Emerging Markets Equity Composite(As of 06.30.2018)

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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