Emerging Markets Equity Strategy 4Q 2018

01.18.2019

Key Takeaways

 
  • A weak fourth quarter left the MSCI Emerging Markets Index down nearly 15% for 2018. While our Emerging Markets Equity performance was negative for the fourth quarter and the full year, the strategy outperformed the benchmark in both periods.
  • Macro concerns shaking the markets included the trade and geopolitical confrontation between the U.S. and China, the volatile oil price, and election uncertainty in Brazil and Mexico – but the core issue has been rising interest rates in the U.S. As rates climb, the hand that had squeezed savings out of safe developed market assets towards emerging markets (EM) growth is now releasing its grip. As liquidity flows back from the EM, it will not only raise the price of risk, but make funding difficult in some riskier areas. At the same time, Chinese authorities have been reducing shadow lending in their economy, crimping growth and consumer confidence.
  • For a while, our view has been that easy money has put parts of the market on a cyclical sugar high masqueraded as offering sustainable structural growth. As quality growth investors, we realize the corners in market direction are fiendishly hard to time. We strongly believe that style consistency reduces uncertainty to investors, but the price for holding stable growth businesses through the sugar highs are periods of market relative underperformance. As the economic outlook deteriorated throughout the fourth quarter, our portfolio outperformed the market.
  • The financials sector was the most significant driver of the strategy’s relative returns, with solid performance from our core Indian financial holdings. We were also helped by lack of exposure to cyclical areas such as energy, indebted frontier markets and weak larger markets such as Turkey and Argentina. Our consumer staples holdings – while maintaining a solid outlook – did not perform well through the year. We believe staples offer attractive defensive growth and should provide protection whichever way the economic outlook swings.
  • Despite the negative sentiment in the market, we see a relatively healthy underlying structural picture across the large EMs. For example, although debt levels have risen, much of the debt is local currency-denominated and locally financed, reducing the old problem of having to knee jerk raise rates to protect the currency while putting the brakes on the economy. We see very significant long-term demand potential supporting growth for innovative and well-managed companies and thus we are starting this year with optimism.

Trailing Returns: Emerging Markets Equity Composite(As of 12.31.2018)

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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