A focus on quality as volatility persists

Ivy Emerging Markets Equity Fund
06.12.19

The budding U.S.-China trade agreement that appeared to be a certainty only weeks ago seems to have stalled. Relations between the countries have hit a setback and the risk of a prolonged standoff has grown. While volatility could persist across global markets in the near term, we remain focused on companies that we believe will benefit from powerful overarching themes in emerging markets. Over a market cycle, we think alpha generation and risk mitigation can be achieved by careful management of country risk.

Country event Portfolio action

U.S.-China relations: The souring relationship is likely to be a negative for China with widespread implications across the globe. It may be somewhat offset by fiscal/monetary stimulus and China’s growth-oriented regulatory environment.

Some industries are more sensitive to trade and the value chain disruptions than others. We began trimming/selling trade-sensitive companies late last year and have continued to take action in an effort to mitigate the growing risks with the situation in China. However, we remain positive that companies within certain themes in China will continue to grow: education, ecommerce, the internet, financial inclusion, health care and others.

India election results: Narendra Modi and his political party, the BJP, won by an overwhelming majority.

We think the election outcome is a significant positive factor for India’s economy and for selected industries that may benefit from the increased infrastructure spending and the likely continued structural reforms. The Fund holds companies that we believe can benefit from increased investment spending and better consumer confidence.

Brazil reforms: Under new President Jair Bolsonaro, Brazil is making steady progress on economic issues.

We have maintained an overweight allocation to Brazil, as we expect its congress and new administration to help the economy achieve long-term structural advancements.

 

Despite near-term concerns and likely volatility across the global equity market, we remain optimistic that long-term fundamentals in emerging markets will offer opportunities via several overarching secular themes. For example, many emerging markets are in the early stages of economic development. Favorable demographics, increasing incomes and improving financial markets can make them attractive for trends related to consumption, productivity growth and innovation. The emerging world in particular offers many high-quality companies that are driving innovation both at home and in global markets.

In addition to long-term drivers, there are other factors that we believe will provide emerging markets with positive support during the current turbulent times:

  • Dovish policy from the U.S. Federal Reserve removes one of the headwinds that emerging market currencies faced in 2018.
  • Many emerging market nations are likely to continue to grow gross domestic product at a healthy pace, despite global growth deceleration. We consider this to be a foundation for wealth creation and the middle class consumption growth that underlies many of the potential investment opportunities.
  • While visibility into future earning is foggy, we think the emerging markets offer better value relative to the U.S. Because the effects of the tax cuts and one-time benefits that accelerated U.S. corporate earnings in 2018 have passed, we believe emerging markets now offer a more favorable risk/reward profile.

An active approach to countries, sectors

We believe the inefficient nature of emerging markets provides the opportunity for the Fund to outperform relative to its benchmark index. Our investment philosophy guides our actions:

  • Top-down analysis of macroeconomic drivers and managing country allocations can be crucial components of alpha generation and risk mitigation when investing in emerging markets equities.
  • Themes, both secular and cyclical, can be more powerful in emerging markets because many of these countries are in the early stages of economic development.
  • Fundamental research is a key element of the process and focuses on finding companies with the potential for earnings growth, attractive relative valuations and perceived quality in areas including corporate governance, strength of their balance sheets and competitive positioning.
  • Investing across the valuation spectrum in both growth and value styles allows the Fund to capitalize on the inefficiencies of emerging market equities, depending on the market cycle.

An analysis of key country allocations in the fund

Country Fund Index Ivy Analysis

China
(including Hong Kong)

30.13%

30.84%

With a prolonged trade war now becoming a likely scenario, we expect China to continue easing its regulatory, monetary and fiscal policies. We think such moves will support its economy. We already see early measures that are benefitting the private sector, personal consumption and infrastructure spending, and we think more actions along these lines are likely. In addition, China has changed its policy priorities from “deleveraging and risk management” to “growth and stability.” It also announced a number of policy changes focused on infrastructure spending, increased access to credit for the private sector, tax cuts and fewer regulations on a variety of industries. China’s markets outperformed all other major indices in first-quarter 2019.

Brazil

16.16%

7.60%

After a record-setting recession, Brazil is in the early stages of a recovery. We think valuations there remain attractive and we believe interest rates will stay low because inflation is under control. We are now seeing evidence the election of Jair Bolsonaro as president will support economic growth. His proreform cabinet has been approved and is seeking to fix the country’s fiscal imbalances by addressing pension reform, which may be met with pushback, but remains necessary. We think that effort will be matched by the privatization of state-owned companies and auctions of infrastructure and selected energy acreage.

India

13.76%

9.53%

We believe India adds an attractive risk profile to the Fund because it is relatively immune to the trade-related headwinds elsewhere in Asia. We continue to find what we believe are attractive secular growth stories in financial services, energy and the consumer space. Prime Minister Narendra Modi has defended his incumbency after taking the country through tough reforms such as demonetization and a goods and services tax. We think the return of a Modi government is positive for India because the country can continue the reforms he laid out in his first term.

Russia

8.20%

3.99%

This remains the cheapest market globally, with what we consider attractive companies at attractive valuations. We think Russia has good standalone fundamentals, such as the current and fiscal accounts as well as its foreign exchange reserves. But the fear of sanctions from the U.S. keeps the country’s risk premium high and valuations low.

As a percent of the Fund’s equity assets as of 05/31/2019 vs. MSCI Emerging Markets Index. Allocations are subject to change and are not intended to represent any past or future investment recommendations.


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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.

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.