Future World Fund – Fund Manager Update

Global market sentiment deteriorated at the end of February, as the sharp and sudden rise in the US Treasury yields induced risk-averse investor behaviour. We believe that this is purely temporary and the positive case for EM equities remains intact. Despite the external headwinds, the relevant Emerging Markets stock index rose 0.8% in USD in February.

Economic growth momentum in China steamed ahead, as both the official and Caixin manufacturing PMIs (50.6 and 50.9 in February, respectively) continued to signal the expansion of industrial production. Both gauges indicated that the growth of new domestic orders remained robust, despite headwinds due to Chinese New Year.

Earnings momentum in India kicked into an even higher gear in 4Q20. According to Motilal Oswal, 57% of the companies in their universe beat estimates, which resulted in the second consecutive quarter of significant upgrades in corporate earnings in India. Profits after tax for the Nifty 50 index rose 22.3% in 4Q20, surpassing broker expectations of 7%. After two consecutive quarters of economic contraction, annual real GDP growth in India returned to positive territory in 4Q20 in line with our expectation. The rate of GDP growth reached 0.4% YoY, whilst gross value added rose 1% YoY.

The macroeconomic landscape remained sound in Vietnam, according to the February datapoints. Retail sales growth was 5.5% YoY YTD in February, whilst the manufacturing PMI rose from 51.3 to 51.6. Meanwhile, real GDP growth in Indonesia was -2.2% YoY in 4Q20, as mobility restrictions remained in place to slow the spread of the coronavirus. To boost the domestic economy, the central bank lowered the key interest rate by 25bp to 3.50%. Business sentiment and economic activity in the Philippines improved, according to the manufacturing PMI, which was 52.5 in February. We continue to see significant unappreciated value in the Indonesian and Philippine stock markets.

Economic growth in Brazil gained further momentum in December, as the monthly GDP proxy index increased 1.3% YoY. Industrial production growth was one of the key drivers, which accelerated to 8.2% YoY. President Bolsonaro’s decision to recall the CEO of Petrobras, a state-owned oil company, amplified the volatility in the Brazilian stock market at the end of the month.

The South African economy continues to go through a very challenging period: the unemployment rate remains on the rise (32.5% in 4Q20) and activity in most sectors stagnates or contracts. In February, the government presented the new and updated budget bill. According to their latest estimates, real GDP is expected to grow 3.3% and 2.2% in 2021 and 2022, respectively. Furthermore, the fiscal deficit is foreseen below 10% of GDP in FY2021-22 and onwards. Consequently, gross public debt to GDP ratio would stabilise just under 100% of GDP.

In February, we added Zhongsheng (China, car dealership; ESG rating “C”) to the Alquity Future World Fund. Zhongsheng is benefitting from longer-term structural trends, such as rising disposable income. We also added Multiplan (Brazil, shopping mall operator; ESG rating “C”), as the valuation metrics presented a compelling opportunity at this juncture. We reduced the weightings of Luye Pharma (China, innovative and generic drug manufacturer) and Wuxi Apptec (China, contract research) to lock in recent share price gains.