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Emerging Markets Equities Update and Outlook, Q2 2024

Welcome to our first quarter, 2024 Emerging Markets Update. My name is Ola El-Shawarby, and I'm the Portfolio Manager for the Strategy. And I'm very happy to be giving you a bit of a recap of what happened over the course of the quarter.

Quarterly Trends and Performance

We actually started off the year with still some continuation of the trends in the asset class that we've seen by the end of 2023.

And we had some positive narrative around a more dovish Fed and some expectations that perhaps the interest rates will start coming down sooner. And that contributed briefly to some weakening on the dollar side. But that unfortunately did not last very long and for the bulk of the quarter the dollar was actually still strengthening, which meant that developed markets outperformed emerging markets again for the quarter.

That's something that we saw, but we were also very happy to report that actually our fund performance was quite solid for the quarter. And that's to a large extent thanks to stock selection and some of the decisions that we've made as a result of our investment approach. So stock selection in places like Philippines, which is a relative overweight for us, have been very helpful during the quarter.

We also saw geographies like Taiwan and India, which were good performers last year, continuing to contribute positively to the strategy. In Taiwan, in particular, our largest holding, which is TSMC, has been a great performer over the quarter. And that's largely thanks to tailwinds from the AI trend, which obviously have supported some of the large cap names in the US very strongly. And it's maybe more of a prominent theme here, but we've had some exposure to that through TSMC and other names in the portfolio.

And we've actually also added to our exposure in the semiconductor space and beneficiaries of the memory recovery and AI trends as we continue to see evidence of structural growth there. India continues to be a solid story from a macro reform standpoint with a lot of demographic tailwind and a lot of momentum in the market.

And then our relative underweight in China has supported relative performance this quarter. In China, so far, what we've been seeing is actually some signs of improving or maybe stabilizing macro with strong travel data coming out of the Chinese New Year earlier in the year, and some of the recent Chinese holidays. And also we saw in March some expansion in the PMI, which was the first sign of expansion in a long time.

And again, we are hopeful for further normalization, but it's still going to be a very selective place to invest. And that's exactly what we've been focusing on. Not so much, overall changing the weighting or allocation, but actually optimizing stock selection, identifying pockets of growth that still are present in a place as big as China and maybe, repurposing our allocation within the country towards those pockets of growth.

Market Shifts and Future Outlook

So I think in recent weeks, we've seen some shift in the narrative, again, around the Fed and maybe higher for longer interest rates and the market pushing out some of the interest rate cuts in the US further than initially expected due to stronger US data.

And obviously that has resulted, in a stronger dollar so far year to date, which is not very helpful in the short term for the emerging market asset class. It does put pressure on liquidity and on performance. And so we have seen that impact the market over the last couple of weeks or so. But I think with that, longer term, even if the short term is a little bit pushed out, the trend is going to be that sooner or later we see some improvement and some decline in inflationary trends and with that also US interest rates and that will be helpful for the asset class overall.

We've seen also on the geopolitical front some signs of escalation in the Middle East but then things seem to have been contained over the past week or so. So that's obviously something to monitor. We don't have that much exposure directly to the Middle East region, but obviously if we do see a broadening of the conflict and something that turns more into a regional war situation, then that would impact sentiment and would impact the performance of markets and the asset class broadly speaking, but hopefully it doesn't come to that.

With some of these risks in mind that we continue to track, I'll reiterate a little bit how we're thinking about the longer-term outlook for the asset class and why we continue to be excited.

You're looking at an asset class where disinflationary trends are happening with or without US interest rate cuts. But obviously lower interest rates in the US give more breathing room and results in higher liquidity for emerging markets, which will be helpful. We're also looking at valuations with accelerating growth versus developed markets that are quite favorable and attractive in nature.

It remains an asset class that's largely under owned by investors globally. So positioning is also favorable. We think the longer term setup or the medium to long term setup for emerging markets is still quite favorable, which leaves us excited. And then you combine that with our disciplined approach to EM investing and really trying to identify and find the best high-quality structural growth opportunities across the universe. That makes us quite excited that hopefully we can sustain good performance over time and continue to benefit from those favorable longer-term structural trends.

I thank you very much and looking forward to the next quarter.