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 2021 Performance Highlights
- The Thornburg Emerging Markets ADR Strategy-Wrap returned positive 2.54% (net of fees), modestly underperforming its benchmark, the MSCI EM Index, which was up 5.05%.
- The utilities and financials sectors detracted from the strategy’s relative performance. Allocation effect was modest for both, but stock selection was a headwind. Information technology and real estate sectors both contributed positively to relative performance. Within information technology, strong stock selection drove outperformance, while in real estate, an underweight position was the primary driver 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.