Emerging markets continue to feel the impact of uncertainty about international trade and tariffs, a
strong U.S. dollar, sanctions on Russia and more. Most of these headwinds are idiosyncratic risks and
they have led to negative year-to-date returns in the benchmark emerging markets index. We believe
the fundamental basis for investing in emerging markets is intact; however, until there is more clarity
around the risks, market volatility is likely to persist.
Emerging markets gained nearly 35% in 2017, based on the
MSCI Emerging Markets Index, and started 2018 with a
gain of more than 8% in January. However, as discussions
of tariffs, Russia sanctions and the Brazilian trucker strike
littered the headlines early in the year, the market began to
peel back those gains and was down more than 9% through
Sept. 14, 2018.
Investor sentiment in general about emerging markets still is
under pressure, given these headline risks and in the face of
the strong U.S. dollar. It’s worth noting that there has been a
wide dispersion of returns in emerging markets, especially
when you look at the U.S. dollar returns versus the localcurrency
returns. While many markets have had negative
returns in terms of the dollar, a few of the local market
returns have been positive.
It does not appear that there is a systemic or fundamental
deterioration in many of these markets. As shown in
the chart below, the majority of the pain has been from
currencies. In aggregate, U.S investors have seen a drag
of about 5.5% on returns from the weakening of emerging
Comparing performance in U.S. dollar and local currency terms
country returns based on
MSCI Emerging Markets Index,
U.S. dollar and local currency.
Past performance is
not a guarantee of
Impact on performance, positioning
The Fund had a strong 2017 and outpaced both peers and the
index. However, it has trailed the benchmark this year. The
Fund began 2018 with overweight allocations to China, Russia
and Brazil – each of which has since been hit by headline risk or
the strength of the U.S. dollar.
The largest relative detractors to performance on a year-to-date
basis have been:
- China (-1.80% relative detractor); the main detractors to
performance have been stock selections in Geely Automobile
Holdings Ltd., Hangzhou Hikvision Digital Technology Co.
Ltd. and Baidu.com, Inc.
- Brazil (-1.12% relative detractor); the main detractors have
been a combination of stock selection (Petrobras, Raia
Drogasil S.A. and Banco do Brasil S.A.) and the negative
currency effect from the depreciation of the Brazilian real.
- Taiwan (-0.54% relative detractor); the main detractor has
been an underweight allocation to this market, as it has been
one of the better performers.
We have steadily reduced the Fund’s overweight position
relative to the benchmark index in shares broadly related to
China – including Hong Kong H shares, China A shares and
the Taiwan market – and now have an underweight to these
countries in aggregate. We still believe that China’s economy
can show solid growth while trade negotiations with the U.S.
continue, but we want to see more clarity around the situation
before we increase our allocation to the region.
India is the Fund’s largest overweight. The market in India has
held up well in our view, as it largely is sheltered from global
trade disputes. We believe India’s greatest challenges stem from
the potential for further increases in energy prices and the
uncertainty about next year’s elections there.
Russia is the Fund’s second-largest overweight. We believe the
country’s fiscal position remains strong, supported by high
energy prices. The largest headwind to performance in Russia
is the risk of additional economic sanctions. For example, the
Trump administration recently issued an executive order that
could impose sanctions on any country that interferes with
U.S. elections – a topic that already includes Russia.
Brazil is another overweight for the Fund. Despite the
headline risk around the elections occurring there next month,
we feel that the valuations and the risk/reward tradeoff is a
positive for the allocation.
Valuations, earnings growth offer potential
Despite concerns about some emerging markets, we think
valuations and earnings growth overall remain attractive and we
still believe there are potential opportunities for investors who
can weather occasional volatility. The largest individual security
overweight positions in the Fund now are in high-conviction
stocks related to internet technology, energy and materials.
It has been particularly difficult in recent months to predict how
far the Trump administration will go in its attempts to improve
trade terms for the U.S. with China, partners in the North
America Free Trade Agreement (NAFTA) and the European
Union. Resolution of the NAFTA discussions appear to be
nearing completion, which may allow for a more focused effort
on tackling the trade dispute with China. However, the visibility
of the trade disputes may affect U.S. midterm elections and
further cloud the timing of any progress on a deal with Beijing.
We recognize that a full-blown U.S. trade war with China and
the rest of the world would damage global growth and global
trade, with a significant impact on emerging market countries.
But we still do not think that scenario is likely since the U.S. also
benefits from the steadily growing global economy.
Ivy Live: 2019 Global Outlook – Does the run end?
Thursday December 20, 2018
Past performance is no guarantee of future results. The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any
investment product. The opinions are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of
information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific
objectives, financial needs, risk tolerance and time horizon.
Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences
in accounting standards and foreign regulations. These risks are magnified in emerging markets. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered
at all broker/ dealers.
Top 10 Equity Holdings
The MSCI Emerging Markets Index is an unmanaged index comprised of securities that represent large- and mid-capitalization companies within emerging market countries. It is not possible to invest directly in an index.