Sun Life Schroder Emerging Markets Fund

Market Review 

Emerging market (EM) equities experienced a fall in Q2, with US dollar strength a key headwind. This was despite outperforming developed market peers by a wide margin. The Latin American markets of Colombia, Peru and Brazil were among the weakest markets in the MSCI Emerging Markets Index. A combination of rising concern over a global recession, domestic policy uncertainty, and later in the quarter weaker industrial metals prices, contributed to declines in equities and currencies. The emerging European markets of Poland and Hungary both underperformed by a wide margin, as geopolitical risks stemming from Russia’s invasion of neighbouring Ukraine persisted. The central banks in both countries increased the pace of policy tightening, while in Hungary the government announced windfall taxes on banks and other large private companies. South Korea and Taiwan lagged as the outlook for global trade deteriorated. Conversely, China was the only emerging market to generate a positive return over the quarter. Lockdown measures in certain cities were eased and macroeconomic indicators began to pick up. Meanwhile, additional economic support measures were announced. The authorities also outlined a significant reduction in quarantine for close contacts and visitors to China, which should help to ease supply issues even if the zero-Covid policy seems set to remain in place.    

Fund Review 

Emerging markets delivered a negative return in Q2 2022, with the fund underperforming the index. Both country allocation and stock selection were a detractor to fund performance. At a country level, the overweight positions to Brazil and South Africa, both of which underperformed, as well as the underweight to China, which outperformed, detracted from relative returns. Global recession fears weighed on industrial metal prices later in the quarter, which negatively impacted net exporters such as South Africa and some Latin American markets including Brazil. China outperformed as lockdown measures in certain cities were eased and macroeconomic indicators began to pick up. Additional economic support measures were also unveiled. The authorities also announced a significant reduction in quarantine for close contacts and visitors to China, which should be beneficial in easing supply issues, even if the zero Covid policy seems set to remain in place. Conversely, an elevated cash position, held in a falling market, contributed positively to relative returns.   

Contributors & Detractors: 

• Stock selection was negative in South Africa (u/w Naspers and o/w Gold Fields; Naspers share price rallied following the announcement of an open-ended buyback, funded by the gradual reduction of its stake in Tencent; Gold Fields' share price meanwhile suffered on dilution concerns, following an acquisition proposal),  
• Stock selection was negative in China (u/w Meituan and o/w Prudential; Both companies are expected to benefit from a pick-up in sales growth as COVID-19 restrictions ease, with Meituan also guiding to narrowing losses on new initiatives) 
• Stock selection was negative in South Korea (o/w Naver; the internet conglomerate struggled on the back of growing fears that margins will not recover as the company had previously guided in 2H).  
• Stock selection was positive in India (o/w ICICI Bank and u/w Infosys; ICICI Bank saw gains due to consistent delivery of results, with asset quality holding up better than initially expected during the pandemic; Infosys meanwhile saw increasing cost pressures, resulting in weaker than expected margins)  
• Stock selection was positive in Taiwan (o/w Hon Hai Precision; The attractively valued chip producer used its strong supply chain management to gain market share from competitors which were more impacted by China's Covid lockdowns). 

Outlook:

• Schroders remains cautious on the near-term market outlook.  Emerging markets are facing tightening global liquidity, a strong US$, and a likely slowdown in global trade. High EM inflation is driving central banks to tighten policy. The outlook for commodity countries in EM is now less certain, given slowing global growth. China’s credit impulse has inflected but China's zero covid policy poses ongoing risk to near term growth.  
• Schroders expects a more constructive environment in 2023. Chinese growth may recover supported by policy easing, a low base, pent-up demand, and a potential pivot away from zero covid policy. Inflation may ease on base effects, slowing global activity and easing supply chain bottlenecks. A stabilization in the US$ and a peak in US yields and Fed expectations would provide relief to EM currencies and yields. EM equity valuations have improved. Relative valuations for EM vs US look attractive vs history. EM yields and Forex have adjusted. 
• Risks: COVID-19 policy in China, Ukraine, US-China tension, new variants, the path of inflation, rising state intervention in China’s economy, high retail participation. 

Fund performance

Views expressed are those of Schroder Investment Management North America Inc., sub-advisor to select Sun Life mutual funds for which SLGI Asset Management Inc. acts as portfolio manager. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any mutual funds managed by SLGI Asset Management Inc. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. This commentary is provided for information purposes only and is not intended to provide specific individual financial, investment, tax or legal advice. Information contained in this commentary has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy.

This commentary may contain forward-looking statements about the economy and markets, their future performance, strategies or prospects or events and are subject to uncertainties that could cause actual results to differ materially from those expressed or implied in such statements. Forward-looking statements are not guarantees of future performance and are speculative in nature and cannot be relied upon.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Investors should read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.  The indicated rates of return are the historical annual compounded total returns including changes in security value and reinvestment of all distributions and do not take into account sales, redemption, distribution or other optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

While Series A and Series F securities have the same reference portfolio, any difference in performance between these series is due primarily to differences in management fees and operating fees. The management fee for Series A securities also includes the trailing commission, while Series F securities does not. Series A securities of the fund are available for purchase to all investors, while Series F securities are only available to investors in an eligible fee-based or wrap program with their registered dealer. Investors in Series F securities may pay a separate fee-based account fee that is negotiated with and payable to their registered dealer.

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