FLASH REPORT: Emerging Markets –
merging Market equities continued the
positive trend from the fourth quarter of
2011 and rallied 12.5% in January. This rally
was not entirely unexpected. Tax loss selling,
fund redemptions and overall macroeconomic
uncertainty weighed heavily on the asset class
last year. Once these pressures abated, money
flowed into an asset class that is statistically
inexpensive by historical standards. Institutional
investors who now find themselves
underweight the asset class after last year’s
underperformance are also rebalancing their
portfolios. We suspect that most of this rebalancing
has not yet taken place. Flows into
emerging markets funds were strong, over $11
billion in January.
The global economy continues to be
stronger than many analysts had predicted.
In particular, the US has better-than-expected
employment statistics. This helps emerging
market equities in two ways. A more vibrant
US economy leads to increased exports from
emerging economies and higher commodity
consumption. A better US economy also
encourages investors to move out of cash and
treasuries and into assets with higher expected
returns, such as emerging markets.
Newgate’s Portfolio was well positioned
for this rebound and outperformed the MSCI
Emerging Markets Index during the month.
Materials and energy companies were up over
15%. Allocations to cement and copper companies
in China and iron ore in Brazil added
substantially to absolute and index-relative
performance. The Portfolio benefited from its
relatively small position in Colombian energy.
More defensive sectors, like telecommunications,
did the worst, up less than 3%.
India had the strongest performance of any
major country, up 21% for the month. The
Indian market was last year’s major underperformer,
as inflation above 8% had kept monetary
policy tight. Its slowing economy (expectations
are for GDP growth below 7%) caused the
central bank to begin to cut interest rates. After
a year of underperformance, Indian stocks are
inexpensive relative to historical norms, though
India tends to have higher valuations than its
emerging market peers.
During January we took profits in several
Chinese positions, including companies in
energy, materials and gaming. Some of the
proceeds stayed in China and were reinvested
in industrial companies. We also added to India
to take advantage of the better valuations there,
though we still remain underweight the country.
We also added to gold mining companies
in Mexico. Gold companies are well valued
relative to the price of bullion. We are investing
directly in Latin American and Canadian listed
companies with mines located in the region.
We have avoided South African mining companies,
which generally have higher and more