After a decline of more than 4% in the third quarter of 2019, the MSCI Emerging Markets Index has given back all the gains achieved in the first quarter of 2019 and now stands down a little more than 2% over the trailing 12 months through September 30th. Over the course of a year, we have seen investor sentiment swing wildly from concerns about global growth to cautious optimism to outright bullishness, followed by another collapse in confidence. Investors are once again focused on global growth concerns. The markets have tracked and even amplified these swings in sentiment, as one might expect, during a period where global growth remains sluggish and short-term returns are driven primarily by news headlines and tweets, and less by underlying fundamentals.
The increased volatility has also driven multiple, abrupt rotations in style leadership. Over the last four quarters, we have seen the MSCI EM Value Index outperform twice, while the MSCI EM Growth also outperformed twice. The Thornburg Developing World Fund’s philosophy of pursuing stock-specific alpha with three layers of risk management (strong businesses, balanced three-basket portfolio construction and currency awareness) has helped the portfolio to navigate these rotations while allowing stock selection to drive the returns of our concentrated portfolio. The fund outperformed the benchmark index in all four periods while delivering a 8.14% total return (I shares) over the trailing one year, versus the MSCI EM Index’s negative 2.02% over the same period (see Chart 1).
Top performers during the third quarter were Taiwan Semiconductor Manufacturing Company (TSMC), Micron, Samsung, Hapvida and B3.
- TSMC was the world’s first dedicated semiconductor foundry and has long been the leading company in its field. While rising trade tensions and lackluster earnings growth were headwinds during the first half of 2019, shares increased on optimism related to the rollout of 5G telecom services, reacceleration of earnings per share growth and gross margin improvement.
- Micron specializes in memory and storage solutions, producing products used in everything from smartphones to cloud servers. While the stock pulled back in late September on weaker near-term guidance expectations, it wasn’t enough to completely offset an early quarter rise driven by declining memory inventories and firmer prices.
- Samsung is a global leader in semiconductors, mobile and consumer electronics. Shares hit a 15-month high following analyst upgrades, improving memory market fundamentals and excitement surrounding the rollout of its Galaxy Fold smartphone.
- Hapvida is the third-largest health care operator in Brazil and maintains a presence in both the medical and dental segments. The company has a strong network of more than 1,500 hospital beds, clinics and diagnostic centers and continues to build a durable competitive advantage through organic growth and attractively valued acquisitions. The stock rose on better- than-expected second-quarter results, primarily driven by strong cost management.
- B3 is the leading platform for trading equities, options and fixed income in Brazil. Lower Brazilian interest rates have made equity investing relatively more attractive for domestic investors, and expectations are that foreign investors will be more interested in Brazilian investments if the country’s pension reform bill is passed this year. Incremental volume growth and the company’s tie to Brazil’s improving capital markets environment led to solid performance.
Bottom performers for the quarter were AIA, Tencent, Zee Entertainment, Glencore and Industrial and Commercial Bank of China.
- Hong Kong–based AIA is the largest Asia-focused life insurance company in the world by market value. The stock declined due to concerns about softer sales caused by political unrest in Hong Kong. The near-term political issues have not changed our overall conviction that AIA is a strong franchise in an under-penetrated market, offering a long runway for future growth.
- China’s Tencent is a global technology leader, offering everything from gaming and social media to e-commerce and payments systems. Shares declined on lower-thanexpected second-quarter revenue, the economic slowdown in China and continued U.S.-China trade tensions.
- Zee Entertainment Enterprises is an Indian media company primarily focused on the domestic television advertising market through its mix of free-to-air and pay channels. Zee’s shares declined due to a continued lack of clarity around financial difficulties related to the controlling shareholder, the Essel Group. The controlling shareholder’s personal difficulties have no impact on Zee’s business, but he has pledged the majority of his holdings as collateral for loans used to fund outside business investments, creating a short-term concern about whether lenders could force him to sell his shares. Deceleration in the Indian economy that began late in the quarter put additional downward pressure on the stock.
- Glencore is a diversified natural resources company that operates in metals and minerals, energy products and agricultural products. The stock declined on weaker production and earnings coupled with weaker prices of the commodities that the company is exposed to, most notably coal and cobalt. Moreover, global economic uncertainty broadly put downward pressure on global mining and metals stocks. We exited the position on concerns about certain end-market fundamentals and increasing scrutiny of the company’s African operations.
- Industrial and Commercial Bank of China is China’s largest bank and financial services company. It is also the largest bank in the world by total assets, deposits, loans and number of customers. While recent results were generally in-line with consensus, shares sold off in-step with a macroeconomic slowdown in China.
The real and perceived headwinds that have driven the market gyrations over the last year remain, and in some cases, such as the trade war, have only increased. During the period, global growth expectations have consistently disappointed and, in our view, have been revised lower, primarily due to direct and indirect impacts of the trade war between the U.S. and almost all of its major trading partners. Trade-related uncertainty is not only disrupting normal purchasing behavior along global supply chains but also incremental investment in capacity, which has dampened global investment expectations. Only China and a handful of European and emerging market countries appear to be implementing fiscal or regulatory stimulus to protect their economic growth.
Central banks are doing their best to fill the void created by low corporate confidence and limited visibility with a renewed focus on easing monetary policy. Since May, we note at least 45 easing moves by major central banks. Every central bank in the top-10 largest economies has lowered interest rates this year. Most notably, the U.S. Federal Reserve reversed recent interest rate increases with two interest rate cuts through the end of September 2019 to offset trade-related headwinds. Historically, a slowdown in developed market growth and a shift toward a more accommodative stance from the Fed have led to dollar stabilization and emerging market equity outperformance. While that is still our base case, we admit that for this scenario to evolve we need to see some de-escalation of the trade war, particularly the dispute between the U.S. and China.
It may seem hard to remain optimistic about emerging markets, or equity markets in general, given the third quarter’s elevated headwinds. But while economic activity has slowed, global central banks have acted quickly to moderate the deceleration. For a decade, global investors have been wise to expand the long-held U.S. mantra—“Don’t fight the Fed!”—to a broader group of global central banks. So much liquidity and policy attention is being directed at the global slowdown that it is difficult to imagine the deceleration extending beyond the first half of 2020, if not the end of 2019. That would imply that the current ebbing in growth is more a pause that refreshes before growth stabilizes and possibly reaccelerates. In this context, modest developed market growth and stable developed market interest rates are a notably attractive backdrop for emerging market returns.
Multiples have contracted and underlying earnings expectations have been drifting lower for most of this year. But, as noted, policy support is on the way. We are cautiously optimistic that even without a meaningful resolution to the U.S.-China trade dispute, earnings could begin to drive share prices again. However, until the case for a reacceleration can be made more confidently, we would expect headlines and tweets to continue to cause choppy market moves. We believe our portfolio construction process is well suited for this type of market environment, as was demonstrated by its lower volatility and ability to perform in various environments over the last 12 months. We will maintain disciplined portfolio balance while continuing to take advantage of price dislocations caused by broad market volatility or the failure of other market participants to recognize the prospects of an individual stock whose business fundamentals we determine to be inaccurately reflected in its share price.
We remain focused on investing in attractively valued and fundamentally driven opportunities in emerging markets, with risk management, as always, top of mind. Thank you for your continued support and for investing alongside us in the Thornburg Developing World Fund.
|Alibaba Group Holding Ltd.||6.90%|
|Tencent Holdings Ltd.||6.20%|
|Samsung Electronics Co. Ltd.||4.90%|
|Taiwan Semiconductor Manufacturing Co. Ltd.||4.40%|
|AIA Group Ltd.||4.00%|
|Industrial & Commercial Bank of China Ltd.||3.70%|
|ICICI Bank Ltd.||3.20%|
|HDFC Bank Ltd.||3.00%|
|Micron Technology, Inc.||2.60%|
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate so shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than quoted. For performance current to the most recent month end, see the mutual funds performance page or call 877-215-1330. The maximum sales charge for the Fund’s A shares is 4.50%.