PORTFOLIO UPDATE – Emerging Markets
April 2013
 he MSCI Emerging Markets Index gained 0.8% in April, reducing the year-to-date decline to less than 1%. Economic data globally have been disappointing. However, valuations were so depressed (near crisis levels for many countries) and stock analysts so pessimistic that any positive news would have sent stocks higher. Returns for the Index were somewhat muted due to the decline in South Korean stocks (2.4%), largely attributed to tensions with North Korea. These tensions have subsided for now, due to attempts among the US, both Koreas and China to diffuse the situation.
India was a major contributor (up 4.2%) to the asset class and Newgate’s performance. Only technology (comprising 15% of the Indian market) had negative returns. Newgate’s Indian exposure represents 12% of the total Portfolio, focusing on the financial sector. India’s economy, especially its financial sector, are tightly regulated. Reforms are frequently promised but have been tepid if they happen at all. The latest reforms are showing some signs of implementation and impact. This should benefit stocks, but also the rupee, as it appears India is becoming an attractive destination for foreign capital.
Although the Portfolio is underweight Taiwan, its overweight position in Taiwanese technology companies boosted returns. Russian technology was also a positive contributor to performance. Simply buying technology shares broadly has proven to be unwise in this market. The financial markets are expressing clear preferences for business models (mobile as opposed to stationary) and platform (Internet as opposed to fixed network).
Chinese shares gained 1.2%. There was relative strength in consumer and financial companies, but weakness in energy and materials. Several disappointing economic reports were released. The government seems committed to containing property values and deflating real estate bubbles. For the foreseeable future, China will be in the odd situation of having an oversupply of empty houses while hundreds of millions live in substandard housing, much of which will need to be replaced over the next two decades. We sold shares in Chinese insurance and industrial companies while adding to Chinese banks.
Major overallocations relative to the Index are:
- Chinese financials and technology
- Financials in India and Korea
Major underallocations relative to the Index are:
- Korea, especially technology
- South Africa, especially financials
The greatest contributors to performance were:
- Overweight India, especially financials and healthcare
- Overweight Taiwanese technology
- Underweight South Africa and South Korea
The biggest detractors from performance were:
- Gold mining in Latin America
- Underweight Brazilian energy
|
