Overall, emerging markets delivered a positive return in Q2 2020, with the fund outperforming the benchmark index. Country allocation was a negative contributor to performance and stock selection was positive.
An underweight position to South Africa and zero-weight to Thailand, both of which outperformed in a risk-on environment, detracted from fund performance, as did the fund’s cash position in a rising market. South Africa, after initially announcing a strict lockdown to control the spread of COVID-19, started to reopen its economy, as was evidenced by a marked improvement in economic data. Thailand outperformed on hopes of a recovery in global demand in the second half of 2020.
These effects were somewhat offset by an overweight position to Argentina, which outperformed. Argentina rallied sharply, underpinned by a rally in large index stock Globant.
Stock selection was positive overall in Q2. In Russia, an off-benchmark holding in internet services company, Yandex, contributed to returns after markets reacted positively to the company’s agreement to end its joint venture with Sberbank during the quarter. In addition, an overweight to Moscow Exchange benefitted returns after stock rose on stronger-than-expected Q1 earnings results, supported by a pick-up in fee and commission income amid increased market volatility. An underweight to Norilsk Nickel was also beneficial after a major diesel spill resulted in significant environmental damage and stock underperformed.
In Argentina, an off-benchmark holding in Mercadolibre, an online marketplace and e-commerce platform, contributed to returns after COVID-19 lockdowns bolstered demand and stock outperformed. An overweight position in Delta Electronics in Taiwan and overweights to Naver and Samsung SDI in Korea also contributed positively to fund returns. In Brazil, a zero-weight to Banco Bradesco positively impacted performance, as the bank as has been affected by competition from new entrants, as well as concerns over the impact of COVID-19 on growth and overall asset quality.
Stock selection in India was negatively impacted performance. A zero-weight to Reliance Industries negatively impacted fund performance. Stock rose after the multi-national conglomerate succeeded in reducing leverage by raising funds from the sale of its stake in the telecom business, Jio. Overweight positions in ICICI Bank and Tata Consultancy also detracted from overall performance. ICICI Bank has been impacted by concerns over deteriorating asset quality for Indian banks, despite a government led moratorium in the short term. Tata Consultancy’s business and share price was relatively resilient earlier in the year, however the stock lagged the Q2 market recovery.