Ivy Emerging Markets Equity Fund

Ivy Emerging Markets Equity Fund
03.31.18

Market Sector Update

  • Emerging market equities had positive returns in the low single digits in the first quarter and outperformed developed market equities. Both saw a significant increase in volatility during the quarter. The best-performing major emerging market countries were Brazil and Russia and the best-performing sectors were energy, health care and financials.
  • Global trade and economic activity continued to be strong across all markets despite concerns about the potential for a trade war between the U.S. and China following the imposition of tariffs between the two countries. China’s constitution was changed during the quarter to eliminate presidential term limits, including current President Xi Jinping.
  • Oil prices continued to rebound, which boosted returns in the energy sector as well as equities in commodityproducing countries. Emerging market currency returns were mixed.
  • Tensions on the Korean Peninsula appeared to have cooled during the quarter. A series of meetings involving representatives of North Korea, South Korea, the U.S., China and several other nations set up the potential for face to face talks between President Donald Trump and North Korean leader Kim Jong-un. If there are successful talks, the potential change in economic activity in the region could be significant.

Portfolio Strategy

  • The Fund had a positive return for the quarter and outperformed its benchmark index and Lipper peer group average (before the effect of sales charges).
  • Key contributors to performance included stock selection in the information technology, health care and energy sectors. From a country allocation standpoint, overweight allocations relative to the benchmark to Russia, China and Brazil also contributed to performance.
  • Key detractors included holdings in the consumer durables and materials sectors as well as an overweight allocation to equities in India.
  • We added exposure during the quarter to financial services firms and the energy sector and reduced allocations to consumer staples and telecommunication services. At quarter end, the Fund’s largest sector overweight positions relative to the benchmark were in information technology and consumer discretionary, and the largest underweights were to telecommunication services, industrials and consumer staples.
  • The largest overweight country allocations were to China, Russia and Brazil. The Fund added to financials and energy in Brazil; financials, health care and property in China; financials in South Africa; and industrials in India. We decreased exposure to India during the quarter. The largest country and regional underweight positions relative to the benchmark were Taiwan, countries in the Association of Southeast Asian Nations (ASEAN) and South Africa.

Outlook

  • We believe geopolitics, especially related to trade policies, the Korean Peninsula, the Middle East and G3 central bank policies (European Union, Japan and U.S.) will continue to have an outsized impact on emerging market equities, fixed income and currency volatility. In general, we do not expect any short-term breakthroughs related to the Korean Peninsula, but there are possible roadmaps to stability in that region in the midterm.
  • National or regional elections scheduled this year in the U.S., Brazil, Mexico, Colombia, Venezuela, India and Iraq are likely to be important factors to watch. In addition, Turkey and South Africa face non-election year political challenges, and ongoing tensions in the Middle East remain a concern.
  • There were strong revenue and earnings revisions for most key emerging market countries and sectors in 2017. We believe these trends will continue this year. We remain constructive on Brazil, Russia and China.
  • We think the elimination of presidential term limits in China will allow President Xi to implement his long-run economic programs such as “Made in China 2025” and “One Belt, One Road.” However, it is likely to complicate any regional and international negotiations since President Xi will not be limited by concerns over his time in office.
  • We believe the worst has passed for the energy sector. China continues to shut down capacity in many basic industries, which is beneficial for many emerging market financial service providers, currencies and economies. Global trade among emerging markets continues to be strong despite recent talks of tariffs on Chinese and U.S. goods. We think U.S. tax reform legislation that took effect this year is likely to be another positive for emerging markets.
  • The Fund’s focus will continue to be on new economy industries such as internet, technology hardware, new energy vehicles and biosimilars/biotechnology. Financial services remains a high growth sector in most emerging markets and we are focusing our efforts on finding what we believe are the most attractive banks, insurers and brokers. In our view, emerging market valuations remain attractive despite last year’s strong performance.

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 current through March 31, 2018, 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. Past performance is not a guarantee of future results.

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.