Emerging markets (EM) delivered negative returns in Q3 2021, with the fund outperforming the index. Country allocation was negative and stock selection positive.
At a country level, an underweight to India and zero weight to Saudi Arabia, both of which outperformed, as well as an overweight to Brazil, which underperformed, detracted from relative performance.
Net energy exporters, including Saudi Arabia, outperformed as supply constraints drove energy prices higher. India delivered strong gains with sentiment boosted in part by the recent stream of initial public offerings. India’s economy continued to recover and, although question marks remain over efficacy, vaccination rates have picked up markedly, with the country on track to provide a first dose of vaccine to 70% of the adult population by November.
Brazil was the weakest index market as above-target inflation continued to rise, meanwhile Q3 GDP growth disappointed. Developments in China weighed on industrial metals prices, and political rhetoric picked up ahead of next year's presidential election. These effects were somewhat offset by an underweight to China, which underperformed, and an overweight to Russia, which outperformed.
In China, regulatory actions triggered initial market weakness which was compounded by the re-imposition of some Covid-19 restrictions. As well, supply chain disruptions in August; worries about possible systemic financial system risks stemming from the potential collapse of real estate developer Evergrande and power shortages, weighed on the market. Meanwhile, Russia conversely saw strong gains on surging energy prices.
Stock selection was positive in China, with overweight positions in Great Wall Motors Company and China Mengniu Diary Company. Great Wall Motors saw stronger than expected Q3 results coupled with ambitious targets for car sales and increasing disclosures around the company's new-models pipeline and technology plans. China Mengniu Dairy performed well on first half results and it reaffirmed the outlook for continued margin improvement,
In South Africa the fund was overweight FirstRand Ltd. a financial services company and underweight Naspers, a multinational holding company. FirstRand share price gained over the quarter having reported a faster than expected recovery in earnings, with ROE returning to target levels, Meanwhile Naspers, with a large stake in China’s Tencent, struggled owing to a period of weak performance from Tencent, with regulatory concerns in China manifested in a potential anti-monopoly fine for the subsidiary.
In South Korea we were underweight Kakao, an internet company and overweight Korea Zinc. Kakao faces uncertainty as regulatory concerns rise for fintech and other online businesses in South Korea. However, Korea Zinc performed well thanks to the launch of new electric vehicle battery projects.