Video: Portfolio Manager Update

Chetan Sehgal, Lead Portfolio Manager, discusses some of the most exciting opportunities across emerging markets, key portfolio activity and recent market events.

Video transcripts:

Market overview

Q2 was a very interesting time in the markets.

There was a lot of rotation which took place in the markets and it was very interesting actually because, you know one just talks about growth versus value, but there was a lot more rotation which took place in the markets. For example, the best performing markets in Q2 were markets such as Brazil, Saudi Arabia, Russia, Mexico, India. You know, Brazil and India actually were impacted by the second wave of COVID and one did not expect them to be the best performing markets in Q2 but that's how they turned out to be.

And the traditional leaders, which are countries like China, you know, they lagged the market quite significantly in Q2. Similarly, in terms of sectors, sectors such as energy and materials, they did very well because oil prices obviously went up in the last quarter.

And the other sectors which have traditionally led the emerging markets, such as communication services, information technology, consumer discretionary, they were all impacted in the last quarter.

And then there was a third wave of rotation. Small caps (smaller companies) actually outperformed large caps in the last quarter. So, I would say Q2 was one of the reasons why one should always be diversified within emerging markets. So, you need to be diversified by country, by sector and across the cap curve.

Portfolio activity

As I mentioned, we saw a lot of rotation in the markets in the Q2 quarter. That gave us an opportunity, number one, to pick up some ideas in the small cap universe, especially in China, because that is a market where we've been traditionally underweight.

We found opportunities in the electrolyte sector. For example, we added one of the leading manufacturers of electrolytes for the electric vehicle and the battery business.

We found opportunities in the software sector in China. We added another name in China, LongShine, which basically does the software for the state electricity grid and also does the charging infrastructure for the electric vehicles charging.

We also found opportunities in Korea in a small cap area, which actually provides chemicals for the semiconductor industry. So, we've added some amount of small cap names in, in the last quarter.

At the same time, we've reduced some of our large cap weights. For example, we reduced our exposure to Unilever which, which has actually been a steady holding for the trust, but we've reduced it because we found better opportunities elsewhere.

We've also reduced our exposure to Prosus because there was a tender offer, which was emerging from Naspers for Prosus. And we found an arbitrage opportunity available. We also reduced our exposure to the Thai banking sector because we felt that the second wave of COVID would be quite detrimental to the Thai banking system.

So, these are the large changes which we made within the portfolios. At the margin we've also reduced some of our exposure to the energy stocks when we haven't actually sold a position in Coal India as we are now committing ourselves to net zero initiative on the climate side.

By and large, those are the big changes which we made in the second quarter.

Opportunities and outlook

We think emerging markets are poised at a very interesting time.

Traditionally we've come to expect performance from only a few sectors within emerging markets, such as the IT sector or the Communications sector, et cetera.

But now we find that there are widespread opportunities within emerging markets. The core competitiveness of emerging markets in sectors such as Energy, in sectors such as Materials is now playing out as well. So there are many more opportunities.

In addition, you’ve seen new business models emerge in countries such as China and Korea which has allowed us to buy those small cap names - simply because we believe that these are longer-term opportunities and these companies are actually quite competitive within their sectors.

So, after the correction in markets such as China in the second quarter, we think that the valuations across emerging markets are low – and far more attractive - because a large number of sectors are participating in the growth of emerging markets.

We've seen earnings uplift come through across many sectors, such as energy and materials. At the same time, the valuations of the companies in the communication services and the IT services and IT sector have become far more reasonable.

So we have, on one side, we've seen an earnings uplift on the other side, we've seen more reasonable valuations, which actually makes emerging markets quite compelling for the rest of the year.

Of course, we expect to see some more volatility relating to policy changes emanating out of China but we view these changes as a one-time reset rather than as an ongoing activity. And therefore, we are far more constructive, even on the Chinese Technology names.

What Are the Risks?

All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments. China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks.

References to particular industries, sectors or companies are for general information and are not necessarily indicative of a fund’s holding at any one time.

For illustrative/discussion purposes only. It is not a recommendation to purchase, sell or hold any particular security. It is neither indicative of any portfolio holdings at any one time nor reflective of current or future portfolio holdings. Past performance is not necessarily indicative nor a guarantee of future performance.