Quarterly Commentaries

Emerging Markets Equity Strategy 3Q 2017

10.19.2017

Key Takeaways

 
  • In the third quarter of 2017, our Emerging Markets Equity Strategy delivered solid returns, but underperformed the strong performance of the MSCI Emerging Markets Index – consistent with our quality growth investment style.
  • Emerging markets continued their bull run in the third quarter, outpacing their developed market counterparts. Important drivers for the benchmark’s performance were Chinese e-commerce companies and Brazilian banks, as well as a lift for dollar investors from rising exchange rates against the U.S. dollar, which is common accompanying market inflows. Rising corporate earnings and growth across the major EM economies helped sustain a healthy outlook.
  • Our Emerging Markets Equity Strategy’s absolute returns were driven primarily by our Information Technology holdings and Indian Financials. However, unsurprisingly against a strong market, Consumer Staples held back relative performance, along with an underweight to the Energy and Information Technology (which reached 27.6% weight within the MSCI EM Index at quarter end) sectors.
  • We are concerned that the strong market performance has been accompanied by market volatility close to all-time lows, as this may imply investors are enjoying current growth but with less attention to the underlying risks. As is often the case, we see a number of geopolitical risks that could lead to a risk-off sentiment. The impending monetary policy normalization by the U.S. Federal Reserve, potential for a U.S./Chinese trade confrontation, or an economic fallout in Turkey or South Africa could all remind investors of the inherent risks in certain markets – while assuming a conflict involving North Korea remains off the cards. As a result, we think that an extra dab of prudence in emerging markets is sensible heading into the fourth quarter. We anticipate that the currencies of the countries in which we are invested should weather any unexpected tightening of financial conditions reasonably well. We believe our portfolio holdings – with strong competitive advantages and structural growth drivers – will continue to grow earnings and consequently deliver investment returns to our clients over time.

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