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Key takeaways
- Second quarter of 2024 saw positive returns in emerging markets (EM)
- Technology stocks drove asset class returns
- Chinese stocks continued in their recovery
- Surprise election results impacted returns in India and Mexico
- Indonesia market returns were hurt by interest rate rises
Market overview
EM performance in the second quarter saw continued leadership by Taiwan and India, with both significantly outperforming the MSCI index in the quarter and year-to-date (YTD).
From a political perspective, the quarter witnessed some surprising election results. In India, the incumbent prime minister Narendra Modi failed to secure an outright majority and had to form government with support from coalition partners. In Mexico, Claudia Sheinbaum’s party dominated the elections, securing Mexico City, key governorships, and a super majority in the lower house of the Congress.
Given the strong data coming out of the US, rate cut expectations were tempered. As a result, there was significant US dollar strength and EM currency weakness in this period as well. Benchmark returns were impacted by weak currencies in markets like Brazil, Mexico, and Indonesia.
China delivered benchmark-beating performance in the quarter, driven by the continuation of policy announcements from the government to support the property market and stimulate consumption activity.
Technology, especially semiconductors, continued their positive momentum. The same momentum is reflected across the vast majority of our strategy’s semiconductor stocks that have direct leverage to artificial intelligence (AI).
MSCI EM sector performance Q2 2024
Source: FactSet, as at 30 June 2024. Data in US$.
Key takeaways
- Second quarter of 2024 saw positive returns in emerging markets (EM)
- Technology stocks drove asset class returns
- Chinese stocks continued in their recovery
- Surprise election results impacted returns in India and Mexico
- Indonesia market returns were hurt by interest rate rises
Market overview
EM performance in the second quarter saw continued leadership by Taiwan and India, with both significantly outperforming the MSCI index in the quarter and year-to-date (YTD).
From a political perspective, the quarter witnessed some surprising election results. In India, the incumbent prime minister Narendra Modi failed to secure an outright majority and had to form government with support from coalition partners. In Mexico, Claudia Sheinbaum’s party dominated the elections, securing Mexico City, key governorships, and a super majority in the lower house of the Congress.
Given the strong data coming out of the US, rate cut expectations were tempered. As a result, there was significant US dollar strength and EM currency weakness in this period as well. Benchmark returns were impacted by weak currencies in markets like Brazil, Mexico, and Indonesia.
China delivered benchmark-beating performance in the quarter, driven by the continuation of policy announcements from the government to support the property market and stimulate consumption activity.
Technology, especially semiconductors, continued their positive momentum. The same momentum is reflected across the vast majority of our strategy’s semiconductor stocks that have direct leverage to artificial intelligence (AI).
MSCI EM sector performance Q2 2024
Source: FactSet, as at 30 June 2024. Data in US$.
Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges.
Portfolio discussion
Communication services was the most additive sector, driven by strong stock selection. This was driven by strength from Chinese gaming/platform company Tencent, which reported strong results during the period. Operating changes to rejuvenate games are gradually bearing fruit, and share gains continue in advertising channels against a soft macro backdrop.
Our overweight to technology names was largely beneficial for portfolio performance during the second quarter. Most semiconductor and related stocks showed strength and this was supportive of portfolio returns. However, Samsung Electronics was slightly down and, as it is a high conviction position, it was a significant detractor. The stock staged a strong recovery in June on the back of investor interest resulting from its relatively reasonable valuation.
Holdings that benefit from part of the AI ecosystem have also been strong, including a Taiwan-based original design manufacturer (ODM) that is leading assembler of AI server chips and another Taiwanese market leader in power supply and AI servers. More mid-cycle names in the space have had mixed returns. Though we did see strong rebounds for IT services companies in June (following more constructive guidance coming out of Accenture). We believe that it makes sense to have diversification across countries, sub-sectors, and durations (short-term and long-term beneficiaries). We believe that investment will eventually flow down to IT services companies.
Indian underperformance was mainly driven by stocks not held; flows year to date have been dominated by domestic and retail investors which have focused their buying on Modi election beneficiaries. As a result, this cohort of best performing stocks are driven by valuation expansion not earnings revisions. We expect some of the speculation to unwind following the less-than-expected Modi majority.
Indonesia has been one of the few emerging markets where the interest rate expectation has been counter-consensus. Over the last 6 months, the Bank Indonesia has had to hike rates in order to defend the currency. Indonesia at the end of the day is suffering from tightening liquidity due to high interest rates and strong dollar. This has been detractive to our allocation to this market, which is largely in financials. We believe as we look toward an easing in US rates that Indonesia will be a key beneficiary.
Portfolio discussion
Communication services was the most additive sector, driven by strong stock selection. This was driven by strength from Chinese gaming/platform company Tencent, which reported strong results during the period. Operating changes to rejuvenate games are gradually bearing fruit, and share gains continue in advertising channels against a soft macro backdrop.
Our overweight to technology names was largely beneficial for portfolio performance during the second quarter. Most semiconductor and related stocks showed strength and this was supportive of portfolio returns. However, Samsung Electronics was slightly down and, as it is a high conviction position, it was a significant detractor. The stock staged a strong recovery in June on the back of investor interest resulting from its relatively reasonable valuation.
Holdings that benefit from part of the AI ecosystem have also been strong, including a Taiwan-based original design manufacturer (ODM) that is leading assembler of AI server chips and another Taiwanese market leader in power supply and AI servers. More mid-cycle names in the space have had mixed returns. Though we did see strong rebounds for IT services companies in June (following more constructive guidance coming out of Accenture). We believe that it makes sense to have diversification across countries, sub-sectors, and durations (short-term and long-term beneficiaries). We believe that investment will eventually flow down to IT services companies.
Indian underperformance was mainly driven by stocks not held; flows year to date have been dominated by domestic and retail investors which have focused their buying on Modi election beneficiaries. As a result, this cohort of best performing stocks are driven by valuation expansion not earnings revisions. We expect some of the speculation to unwind following the less-than-expected Modi majority.
Indonesia has been one of the few emerging markets where the interest rate expectation has been counter-consensus. Over the last 6 months, the Bank Indonesia has had to hike rates in order to defend the currency. Indonesia at the end of the day is suffering from tightening liquidity due to high interest rates and strong dollar. This has been detractive to our allocation to this market, which is largely in financials. We believe as we look toward an easing in US rates that Indonesia will be a key beneficiary.
Portfolio activity
We added three companies to our clients’ portfolios:
Quanta: Quanta is Taiwan’s leading ODM with over 30 years of experience in the industry. There are three key reasons to be positive about Quanta: (1) Growth potential of the AI server cycle, as Quanta has early-mover advantage, strong design capability, and close relationship with global cloud customers; (2) PC shipments are expected to normalise after two years of negative growth triggered by the Covid-19 pandemic (and potential additional upside from AI-PCs); (3) Its Auto/Electric Vehicle (EV) business, where Quanta has started to gain traction. We are in the early stages of a growth cycle and as a proven player in the ODM sector, Quanta should perform well.
Shinhan Financial Group: Korean financials are one of the key beneficiaries of the value up program, and Shinhan has the clearest plan among peers to raise its total capital returns to 40% of earnings and beyond. From a quality perspective, it has the best asset quality and non-performing loans (NPL) coverage among banks in Korea and will be a resilient deliver of returns through all macro conditions. Moreover, management quality and information disclosure is best in class, and the corporate’s team’s focus on Environmental, Social and Governance (ESG) is another positive.
Trip.com: Given its position as the market-leading online travel agency in China, Trip.com will benefit from the structural growth in tourism demand, particularly for outbound travellers. Margin expansion will be determined by mix and cost efficiencies, while the international business should start to contribute to an improving return profile.
We exited two companies:
Wuxi Biologics: We believe that there may be increased risk from proposed US legislation that would prohibit federal funding in connection with biotechnology equipment produced or services provided by certain Chinese companies, including Wuxi. As a result, the established client base may explore alternative sourcing to reduce any potential risk arising from adverse bills on the Chinese biologic supply chain.
LG Energy Solution (LGES): We originally obtained this position through our participation in the IPO. We had hoped that the valuation gap between LG Chem and LGES would narrow through time, allowing us to consolidate exposure through LGES. LG Chem continues to trade at a significant valuation discount to its underlying assets and thus we prefer to obtain our position through LG Chem. The recent downgrade to EV demand means our conviction in the end-market has also decreased.
Portfolio activity
We added three companies to our clients’ portfolios:
Quanta: Quanta is Taiwan’s leading ODM with over 30 years of experience in the industry. There are three key reasons to be positive about Quanta: (1) Growth potential of the AI server cycle, as Quanta has early-mover advantage, strong design capability, and close relationship with global cloud customers; (2) PC shipments are expected to normalise after two years of negative growth triggered by the Covid-19 pandemic (and potential additional upside from AI-PCs); (3) Its Auto/Electric Vehicle (EV) business, where Quanta has started to gain traction. We are in the early stages of a growth cycle and as a proven player in the ODM sector, Quanta should perform well.
Shinhan Financial Group: Korean financials are one of the key beneficiaries of the value up program, and Shinhan has the clearest plan among peers to raise its total capital returns to 40% of earnings and beyond. From a quality perspective, it has the best asset quality and non-performing loans (NPL) coverage among banks in Korea and will be a resilient deliver of returns through all macro conditions. Moreover, management quality and information disclosure is best in class, and the corporate’s team’s focus on Environmental, Social and Governance (ESG) is another positive.
Trip.com: Given its position as the market-leading online travel agency in China, Trip.com will benefit from the structural growth in tourism demand, particularly for outbound travellers. Margin expansion will be determined by mix and cost efficiencies, while the international business should start to contribute to an improving return profile.
We exited two companies:
Wuxi Biologics: We believe that there may be increased risk from proposed US legislation that would prohibit federal funding in connection with biotechnology equipment produced or services provided by certain Chinese companies, including Wuxi. As a result, the established client base may explore alternative sourcing to reduce any potential risk arising from adverse bills on the Chinese biologic supply chain.
LG Energy Solution (LGES): We originally obtained this position through our participation in the IPO. We had hoped that the valuation gap between LG Chem and LGES would narrow through time, allowing us to consolidate exposure through LGES. LG Chem continues to trade at a significant valuation discount to its underlying assets and thus we prefer to obtain our position through LG Chem. The recent downgrade to EV demand means our conviction in the end-market has also decreased.
Important Information
The information provided should not be considered a recommendation to purchase or sell any particular strategy / fund / security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable.
This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’), authorised and regulated by the Financial Conduct Authority. It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
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