While developed markets took a breather, pending greater clarity from the Fed, emerging markets continued their uptrend in August.

Relatively benign economic data in the US and China, a weakening USD, recovering oil prices and better earnings revisions all contributed to the positive sentiment, resulting in continued fund flows into EM equities.

Contrary to earlier months, the Asian markets clearly outperformed in August, driven mainly by Korea, Thailand and very strong Chinese equities, especially those listed in HK. The latter received a boost from some economic stabilisation, cheap valuations and the announcement of the upcoming Shenzhen-HK Stock Connect, further opening up local and HK markets to both global and mainland Chinese investors. Heavyweight Chinese financials and technology stocks led the rally.

Latam was flat in August, with (commodity-related) weakness in Chile and Peru countering the better Mexican and Brazilian markets.

While Russia (oil price) and Turkey did well, the latter despite a potential Moody's downgrade, South Africa fell hard, with the market and currency hurt by the Finance Minister's involvement in a police enquiry.

  • Following an increase in the cyclical exposure, the portfolio is balanced between quality names and cyclical stocks.
  • We are becoming positive on China as the market is catching up after a long period of underperformance and remains relatively cheap. The Shenzhen connect is attracting inflows towards the cheaper HK-listed China stocks, with financials and technology performing well. Fiscal stimulus potential and stabilisation (and slightly improving) growth are also beneficial. Many investors are still underweighting China (especially financials names).
  • We have also raised the grade for the financial sector to neutral.
  • Driven mainly by stock-picking, we outperformed in August. A very positive contribution from several technology-related stocks (including NAVER and Sunny Optical), plus environment-related Chinese companies (including BE Water, BYD and Huaneng Renewables), was only partly offset by our exposure to financials (Bharat FI, FirstRand) and industrials (China State Constr., CCR), which were the only negative contributors.
  • We are starting to play the infrastructure theme, as several indicators are pointing to an increased momentum in infrastructure investment plans, and in emerging and developed markets.
  • The global economy, China, the Fed, the US elections, the USD and the RMB will continue to be some of the main market drivers of emerging market performance.
  • That said, the recent global macro stabilisation, positive earnings revisions and relative valuations are also helping to improve sentiment, with fund flows on the rise and emerging market equities rallying after underperforming for several years in a row.
  • We therefore recently increased our cyclical exposure, while maintaining a focus on quality stocks with a sustainable growth profile.

 

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