FLASH REPORT: Emerging Markets – Portfolio Update
January 2012

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 uncertain costs.