The first two months of 2016 have seen a strong recovery in parts of the emerging investment space that had struggled in 2014 and 2015: the currencies and equity markets of Brazil, Colombia, Indonesia and Russia, and the energy and materials sectors. There have also been two sets of developments that we believe are particularly important for the holdings in the portfolio.
The first is ongoing evidence that fiscal and monetary support is driving a recovery in the Chinese property market. One leading measure of property prices, the CRIC 30 Cities Average Sale Price, has made a strong recovery after the falls in the first half of 2015. Using the 13-week average, sales prices have risen 18.1% since the low in June 2015.
That period has also been characterized by volatility in both the offshore CNH currency market and the domestic Shanghai stock market, by declining foreign exchange reserves and by accelerating pessimism about the Chinese economy. Whilst recognizing that China does indeed have significant challenges, including overcapacity and high credit/GDP levels, we believe that the domestic demand part of the economy remains both robust and well-supported by government policy. As well as the recovering property market, retail sales grew 11.1% in 2015, while in the first nine months of 2015 the value of goods sold through Alibaba increased by 28% over the same period a year earlier.
The portfolio has significant exposure to domestic China, including the property sector (to which the portfolio has a significantly higher allocation than the banking sector), and also to the consumer. As well as internet heavyweights Alibaba (BABA, Financial) and Tencent (HKSE:00700, Financial) (held through South African-listed Naspers), the portfolio is also exposed to white goods (which benefit from household formation) through Haier Electronics (HKSE:01169, Financial), as well as consumer staples. Although there is no direct exposure to the Chinese automobile sector, portfolio holdings Tata Motors and Hyundai Motor both have significant sales in China.
The second development we have seen is a worsening of sentiment towards the Indian economy and Indian equities. Alongside concerns about the effectiveness of the Modi administration, there has been much comment about the strength of the Indian banking system, a lowering of expectations for economic growth and a de-rating of the Indian equity market. The trailing price/book ratio for India fell 21% in the year to February 2016.
We would make three points about India:
- Unlike many other emerging markets, India experienced very little private sector credit creation in the years 2009-2015. This means that whilst the recognition of non-performing loans may rise in 2016, the actual formation of non-performing loans is likely to be limited.
- The economy looks good. Real GDP growth in 2015 was 7.2%, and the current USD nominal GDP growth rate of nearly 8% is one of the strongest in the emerging world. The current account deficit is forecast at only 1.0% of GDP, and a hawkish central bank seems to have tamed inflation. Reforms are needed in the medium term, but the fundamentals seem good.
- It is hard to overstate the benefits that a low oil price brings to India. Inflation, the fiscal balance and the current account balance are all vulnerable to higher oil (and other commodity prices). The collapse in oil prices in 2015 has served as a huge boost to the Indian economy and to the consumers and companies that drive it.
We remain very positive on the outlook for India and have actively sought to increase our exposure to Indian equities during this recent and, we feel, unjustified sell- off.
An investor should consider the Fund’s investment objectives, risks, and charges and expenses carefully before investing or sending any money. This and other important information about the Funds can be found in the Fund’s(s) prospectus or summary prospectus which can be obtained at www.johcm.com or by calling 866-260-9549 or 312-557-5913. Please read the prospectus or summary prospectus carefully before investing. The JOHCM Funds are advised by J O Hambro Capital Management Limited and distributed through FINRA/SIPC member BHIL Distributors, Inc. The JOHCM Funds are not FDIC insured, may lose value, and have no bank guarantee.
RISK CONSIDERATIONS- The Fund invests in international and emerging markets. International investments involve special risks, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging markets. Such risks include new and rapidly changing political and economic structures, which may cause instability; underdeveloped securities markets; and higher likelihood of high levels of inflation, deflation or currency devaluations.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of emerging markets. The MSCI Emerging Market Index consists of the following 23 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. Indexes mentioned are unmanaged statistical composites of stock market performance. Investing in an index is not possible. Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.
Emerging Markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity.
The small and mid cap companies the Fund may invest in may be more vulnerable to adverse business or economic events than larger companies and may be more volatile; the price movements of the Fund's shares may reflect that volatility.
As of December 31, 2015 the fund had invested 1.13% in Alibaba, 0.34% in Tencent, 6.57% in Naspers, 2.46% in Haier Electronics, 2.33% in Tata Motors and 2.33% in Hyundai Motors.
The views expressed are those of the portfolio manager as of March 2016, are subject to change, and may differ from the views of other portfolio managers or the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice.
GDP, or gross domestic product, is a measure of an economy which is defined as the value of all goods and services produced within a certain period of time.
