Local stock markets all over the world reached new heights last year.
The NASDAQ, S&P500, the Norwegian, Russian, Brazilian, Indian local stock indices... They all set new records. However, emerging markets as a whole – despite having a great year – still underperformed the developed world.
Why is that? And how did our DNB fund Emerging Markets manage to strongly outperform in 2019?
2019 started off on an optimistic note
Whilst 2018 was a year to forget for emerging markets, 2019 started off on an optimistic note.
Yes, there were uncertainties surrounding the trade negotiations between China and the US, but the change in tone between the countries in December 2018 carried the markets into the beginning of the year.
Prospects for growth were obviously affected by the trade tensions, but the markets largely ignored the risk of growth downgrades on the positive trade-headlines.
Consequently, emerging markets traded on par with the US for the first few months.
By August the year’s gains were gone
Early May, however, the US again threatened to raise tariffs on China. This not only surprised the market – it caused a tit-for-tat reaction from China, which caused the US to respond by adding tariffs, which caused China to respond by adding tariffs, which caused the US… You get the pattern?
The US threatened to raise tariffs on China and it caused a tit-for-tat reaction.
Eventually, by August, almost all the years’ gains for emerging markets were gone, growth prospects were weak and sentiment was low. Incidentally, this also coincided with higher US target rates, which caused EM currencies to depreciate, putting extra downward pressure on EM stocks. Come mid-August, the total return for the MSCI EM-index was merely 2%. The S&P500 and the MSCI World Index, on the other hand, were up more than 16% and 13%, respectively.
The Emerging Markets soared at last and the year ended well
From September onwards, however, after the US had seen a few months of deterioration in their economic indicators, the tone in the negotiations became gradually better. Despite the noise from the trade talks, EM started performing in line with (and even slightly better than) the rest of the world. Finally, on December the 13th, China and the US agreed to a phase one-deal of their long-lasting trade dispute.
This caused EM-markets to soar for the remainder of the year, reducing the underperformance of the index against its US- and World peers by a third.
Now, the index’s return almost 20% in absolute terms (in USD, slightly more in NOK) is a relatively good year for emerging markets. In fact, it is the 3rd best year over the last 10 years. For the investors in DNB Global Emerging Markets Fund, however, it was a very good year. The fund ended up outperforming the index by 7.2% gross (i.e. before fees).
Sometimes it pays off to stop worrying about all that can go wrong.
What made 2019 an even greater year for our Emerging Markets fund?
The outperformance in our fund can be explained by two factors:
Firstly, the three asset managers, who all concentrate on different regions, each outperformed in their respective regions: Asia, being the main component of the emerging market, naturally contributed the most, but Latin America, Eastern Europe and South Africa all contributed positively to the performance of 2019.
Secondly, it was all down to stock selection. Whilst the fund’s allocation to different regions did not provide any alpha, the stock selection certainly did.
The biggest single contributor to our outperformance in 2019 was the Chinese sports producer Anta Sports.
The Anta stock has long been one of the top holdings in the fund, as we see Chinese consumption in sportswear increasing, and last year it paid off handsomely. Anta continued to increase their margins, grew sales phenomenally, and bought competitor Amer Sports (whose brands include Arc’teryx, Wilson, Peak Performance, etc.), which ought to increase their offer of premium sportswear in Asia. We continue to hold a positive view on the stock.
What do we think about 2020?
For 2020, we do expect emerging markets to continue to do well.
One of the main obstacles for growth has found a temporary solution with the phase one deal between China and the US, and we continue to see both monetary and fiscal stimulus in high-conviction countries like China, India and Brazil.
Additionally, we expect a continuation of market-friendly reforms and the opening up of the emerging market economies, despite tougher global trade dynamics.
Sometimes it pays off to stop worrying about all that can go wrong. Sometimes it pays to love the emerging market. We believe 2020 might be one of those years.
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