Emerging Markets & Asia Manager Update, 20/08/2021
As a continuation on from our previous bi-weekly communication, where the discussion focused on our overall views on Emerging Markets, Asia, and China in particular, we thought it would be a good idea to share with you the thoughts of our managers and more importantly the actions being taken in response to the challenges currently being presented in these markets.
As a quick reminder of the key themes; the Chinese government recently announced an extensive regulatory overhaul of the education sector, including a ban on accepting foreign capital, following on from previous government interventions in the internet sector, as well as guidelines on antitrust and data privacy.
Furthermore, despite the recent short-term underperformance of Emerging Markets and Asia versus European and US counterparts in 2021, we can take comfort from both the long-term track record of the respective managers we have employed and their ability to consistently deliver alpha even when their regions are not in favour.
Blackrock Emerging Markets – Lead Manager Gordon Fraser
Despite it being a tough year for investing in Emerging Markets with the MSCI Emerging Markets benchmark returning -1.53% at the time of writing, we are once again pleased with how our strategy, run by Gordon Fraser, Co-head of Emerging Market Equities at Blackrock, has performed. As ever, consistent with the team’s philosophy, the manager has been extremely active adapting the portfolio to changing macro and regulatory environments of the countries within his portfolio. Year to date the fund has returned +1.02%, +2.55% over benchmark. The manager is in line to deliver outperformance for the fourth year in a row since taking over in 2017.
As a result of the aforementioned challenges, the manager has altered exposure within China away from tech and internet towards electric vehicle companies given the differing Government policy towards the two sectors. As such the fund reduced position sizes in internet giants such as Tencent and Alibaba, stalwarts of the Emerging Markets index, believing the heightened regulatory pressure will remain for the foreseeable with an increased premium for companies in this sector therefore required. The additions of an electric vehicle manufacturer along with a Chinese lithium battery manufacturer is more aligned with policy direction in China and should therefore face less headwinds in the short to medium term.
The fund is currently overweight Russia, India and Kazakhstan, and underweight China, Taiwan, South Africa, and South Korea. From a sector perspective the fund is overweight cyclical value; financials, industrials and energy whilst being underweight consumer staples, consumer discretionary and information technology. Broadly speaking, overall positioning is consistent with the views of TS Lombard, our macro strategist, who believe the best returns are to be found in more cyclical sectors outside of China.
Fidelity Asia Pacific Opportunities – Manager Anthony Srom
As with Emerging Markets, there have not been many tailwinds for the Asia Pac ex-Japan investor. Year to date the MSCI AC Asia Pacific ex Japan benchmark has returned -1.89%. The manager however has extended his track record of strong long-term performance and returned an impressive +7.06% over the same period for his investors, equating to a relative performance of +8.95%.
The manager has keenly followed Chinese regulatory developments and believes greater focus is now needed in this area when assessing companies. The manager is of the opinion that the internet sector will remain weak in the near term given the current level of intervention from government. The fund’s main exposure in this area is through Alibaba, a core holding in the fund. The manager is currently happy to hold Alibaba given that it has been at the forefront of the regulatory clampdown, with the antitrust risk more well quantified than other companies and therefore potentially less associated downside risk.
The manager has not owned any education companies in the recent past (down c.80%), primarily due to unattractive valuations, although he has followed the story closely since the initial news came to light in March. The manager did however take the opportunity to purchase Focus Media, China’s largest operator of indoor advertising media. These were purchased when the shares were down significantly upon the March announcement due to the threat of all online education platforms potentially being prevented from advertising in the future. By the team’s calculation, just 6% of the Focus Media’s revenue came from the education sector. Taking the worst-case scenario of a full advertising ban, the manager believed the shares to be oversold and therefore offering an opportunity to open a position.
In short, despite the headwinds being faced in Emerging Markets and Asia, we believe our managers are holding up extremely well and on an individual strategy basis remain some of the highest conviction funds in our portfolios.
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