Ivy Emerging Markets Equity Fund

Ivy Emerging Markets Equity Fund

Market Sector Update

  • Emerging market equity returns were negative for the quarter and underperformed developed market equities. Emerging and developed equity markets continued to see significant volatility.
  • Turkey was the worst-performing major emerging market country – down about 21% in U.S. dollar terms for the quarter – as the Central Bank of Turkey failed to raise rates as inflation rose well into double digits. Thailand, Mexico, Brazil and Russia were among the stronger emerging markets, with each market generating positive returns for the quarter. However, China’s market was down 8.5% in dollar terms as investor sentiment was negatively impacted by trade pressures.
  • Tariffs and the potential for an extended trade war between the U.S. and China impacted emerging markets. Tariffs remain on much of the world’s steel and aluminum shipments to the U.S. Most affected nations have imposed tariffs on a broad range of U.S. goods. The Trump administration's end-game on trade is unclear, which has added to market uncertainty.
  • As the quarter ended, Mexico, Canada and the U.S. agreed to a new trade pact to replace the North American Free Trade Agreement (NAFTA) when ratified.
  • Oil prices continued to show strength during the quarter and boosted returns in the energy and materials sectors. The U.S. dollar strengthened against all major emerging market currencies except the Mexican peso and Thai baht.
  • Upcoming midterm elections in the U.S. and presidential elections in Brazil could see dramatic changes with potential ramifications for local and global growth.

Portfolio Strategy

  • The Fund had a negative return for the quarter and underperformed its benchmark index.
  • The Fund’s performance reflected macro events during the quarter and mainly reflected the negative impact of trade tensions with China. Stock selections and weighting versus the benchmark in China resulted in negative relative performance. We underestimated the resolve of the Trump administration to push China on trade, which affected both the overall weighting and stock selections there. The situation is evolving as the Trump administration is keen to sign deals with Europe, South Korea, Japan, Canada and Mexico while continuing to pressure China.
  • The Fund outperformed the benchmark return in other country holdings (as a group, excluding China), but not enough to offset the impact from China. The key contributions came from the following:
    • South African equities were down more than 7% in the quarter, but the Fund’s holdings were up more than 3.7% although the Fund was underweight the country versus the benchmark. Performance benefitted from stock selection as well as being underweight the market.
    • While the rupee weakened in India, the Fund’s holdings outperformed again on stock selection as our holdings generated a positive return while the benchmark was negative.
    • The Fund also outperformed in Latin America, primarily because of holdings levered to Brazil and positive returns and outperformance in Latin American holdings versus the benchmark.
  • The biggest sector detractors to performance in the quarter were from holdings in information technology, industrials, financial and consumer. The positive contributors were health care, energy and materials.
  • At quarter end, the Fund’s largest sector overweight positions versus the benchmark were in consumer services, information technology and real estate, while the largest underweights were in communication services, financials and consumer staples.
  • The largest overweight country exposures versus the benchmark were to India, Russia and Brazil. The largest country and regional underweights were to Taiwan, South Africa and the member states of the Association of Southeast Asian Nations (ASEAN).


  • Tariffs and trade remain front and center, as global trade is an important driver of emerging markets. It appears things are resolving when it comes to a NAFTA replacement, but the trade war with China continues to worsen. China has a diverse economy and we think it will weather the storm. It’s unclear, however, how long these issues will last and as such we’re more positive on domestic themes in China versus those related to technology, exports and industrials.
  • The ongoing strength in the U.S. dollar, driven by rate hikes by the U.S. Federal Reserve, is another issue impacting emerging market currencies across the board. We think emerging market currencies are likely to have a mixed performance versus the dollar, with those that are tied to oil and internal reforms likely to be stronger on average.
  • Higher oil prices have been positive for countries such as Russia but are pressuring the fiscal situation and consumer spending in Turkey, India and the ASEAN countries.
  • While global gross domestic product growth has slowed, emerging markets are generally seeing strong revenues and earnings growth with the exception of Turkey and South Africa. Earnings per share – or “bottom-line growth” – are forecast to grow at a rate in the low-teens in U.S. dollar terms. We believe valuations still are attractive, with price/earnings ratios below historical averages for this point in the economic cycle both on an absolute basis and relative to the developed world.
  • We remain bullish on the energy and materials sectors. Global crude oil inventories have rebalanced, and Saudi Arabia and Russia continue to have coordinated efforts to control global supplies. The upcoming imposition of sanctions on Iran may lead to a temporary spike in crude prices. China continues to shut down capacity in many basic industries, which is likely to benefit many emerging market miners and basic industry participants.
  • We believe emerging markets across Asia will have solid economic growth and benefit from demographic tailwinds. Asia has an estimated 50% of the world's Millennials, which we think offers potential for companies providing the goods and services they seek.
  • We still find opportunities in “new economy” industries such as those related to the internet and biosimilars/biotechnology. We believe the financial services sector is likely to remain a high-growth segment in most emerging markets.

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 Sept. 30, 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.