After sliding in February and March, emerging market equities regained traction during the second quarter. Despite strong positive returns, the quarter wasn’t without its challenges for the asset class. Higher than forecasted U.S. inflation, coupled with ongoing COVID outbreaks across some EM economies, contributed to downward pressure over the first half of May. In response to the inflationinduced volatility, global central banks worked to quell concerns over shorter-term interest rate tightening and accelerating vaccine distribution in India and Brazil helped further abate investor fears. As a result of improving investor sentiment, emerging markets outpaced developed markets over the back half of the quarter, with markets like Brazil and Russia taking the lead.
Second-Quarter Performance Highlights
- The Thornburg Developing World Fund returned positive 4.4% (I shares), modestly underperforming its benchmark, the MSCI EM Index, which was up 5.1%.
- The utilities and health care sectors detracted from the fund’s relative performance. Allocation effect was modest for utilities, but stock selection was a headwind. An underweight allocation to health care, the index’s top performing sector, drove relative underperformance. Information technology and consumer discretionary sectors both contributed positively to relative performance. Within information technology, strong stock selection drove outperformance, while in consumer discretionary, stock selection and currency effect were primary drivers of relative performance.
- On a geographic basis, stock selection within China and Taiwan detracted from relative results. Brazil and Uruguay contributed strongly to relative performance, with stock selection being the primary driver in both cases.
Current Positioning and Outlook
While economic indicators continue to remain supportive of a broad-based reopening, global uncertainty still remains high. Implications of inflation, as well as the potential timing of central bank tightening are points of much consternation, and value and growth dynamics continue to battle for market leadership. We are maintaining heightened awareness of the sources of inflation across markets and considering where it seems like a healthy outcome of demand recovering faster than idled supply restarts versus certain segments truly getting overheated. Broadly, we view recent inflation spikes as transitory, primarily an outcome of shorter-term supply and demand imbalances, as economies find their post-COVID footing. Despite the global uncertainty, we believe current market forces remain supportive of emerging markets.
As always, our goal remains to participate in a variety market in environments and we’re focused on maintaining portfolio style balance, mitigating index relative volatility, and relying on our high conviction portfolio of strong businesses to drive future performance.
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%.