Ivy Emerging Markets Equity Fund

Ivy Emerging Markets Equity Fund
12.31.17

Market Sector Update

  • Emerging market equity returns were positive for the quarter, generating mid-single-digit returns, and outperformed developed market equities. The best performing countries were South Africa, Greece and India, while the best performing sectors were healthcare, consumer discretionary and materials. Global trade and economic activity were strong across all markets.
  • Oil prices and hard commodities continued their price rebounds into the quarter end. This boosted returns in the energy sector as well as equities in commodity-producing countries. Emerging market currencies continued to add to returns.
  • Despite continued concerns over North Korea’s efforts to develop capabilities to launch intercontinental nuclear weapons, economic activity in the Asia-Pacific region remained resilient. Diplomatic and economic efforts to halt the progress of Pyongyang’s military research continued to be a challenge.
  • Last year’s Chinese Politburo Standing Committee reshuffle saw President Xi further consolidate his power. This was positive for stable Chinese, Asian and global growth.

Portfolio Strategy

  • The Fund had a positive return for the quarter but modestly underperformed the benchmark index. Key positive contributors to performance included strong stock selection in consumer stables and financials. From a country allocation standpoint, overweight allocations to China, India and Russia benefitted performance.
  • Key detractors to performance were Asian information technology hardware and material stocks as well as an overweight allocation to Turkish equities.
  • Exposure to energy, materials and financial services were added to during the quarter, while allocations to technology hardware were reduced. At quarter end, the Fund’s largest sector overweights were information technology and consumer discretionary, while the largest underweights were telecommunication services, industrials and financials.
  • At quarter end, the Fund’s largest overweight country exposures were in Brazil, Russia, India and China. The Fund added to Brazilian financials, energy and consumer-facing names; Chinese financials and autos; and Indian energy and autos. Despite the addition to Indian energy and autos, the Fund’s exposure to India was decreased over the quarter. The largest country and regional underweights were South Africa, Taiwan, and Association of Southeast Asian Nations (ASEAN).

Outlook

  • We believe geopolitics and “G3” (European Union, Japan and the U.S.) central bank policies will continue to have an outsized impact on emerging market equities, fixed income and currency volatility. There are many important national or regional elections to be held this year in the U.S., Brazil, Mexico, Colombia, Venezuela, India, Russia, Iraq and Egypt. In addition, Turkey and South Africa will be facing their own non-election year political challenges. These elections as well as ongoing tensions on the Korean Peninsula and the Middle East will be watched closely.
  • 2017 saw strong revenue and earnings revisions for most key emerging market countries and sectors. We believe these trends will continue this year. We remain constructive on all of the “BRIC” (Brazil, Russia, India and China) markets.
  • We believe the worst has passed for the energy sector. China continues to shutdown capacity in many basic industries which is beneficial for many emerging market financial service providers, currencies and economies. Global trade amongst emerging markets continues to be strong and the recent U.S. tax reform should be another positive for emerging markets.
  • The focus will continue to be on new economy industries such as internet, technology hardware, new energy vehicles and biosimilars. 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 December 31, 2017, 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.

Aditya Kapoor, CFA, was named a portfolio manager on the Fund in January 2017.

Class R6 shares were renamed Class N on March 3, 2017. Class T shares were introduced July 5, 2017.

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.