Ivy Emerging Markets Equity Fund

Ivy Emerging Markets Equity Fund
09.30.17

Market Sector Update

  • Emerging market equity returns were positive for the quarter, generating high single-digit returns, and outperformed developed market equities. The best performing regions and countries were South America, China and Russia, while the best performing sectors were real estate, energy and materials. Global trade and economic activity were strong across all developed markets. Brazil finally exited an extended deep recession and that market rebounded sharply after new political scandals which had developed in May.
  • Oil prices rebounded in the quarter notwithstanding the disruptions of Hurricane Harvey. This boosted returns in the energy sector as well as other commodity-producing countries.
  • Despite continued concerns over North Korea’s efforts to develop capabilities to launch intercontinental nuclear weapons, economic activity in the Asia-Pacific region remains resilient. Diplomatic and economic efforts to halt the progress of Pyongyang’s military research continue to be a challenge.
  • We continue to see trade negotiations progressing in a pragmatic fashion and do not expect any trade wars to develop.
  • The Indian economy was and will continue to be impacted by the July 1 rollout of a national Goods and Services Tax (GST). GST will lead to a simpler tax system, which should boost revenues for the government while making the country more efficient. The hiccup from the GST rollout hurt June quarter results and will also likely impact the entire second half of this year. That said, we believe the short-term pain will lead to a higher rate of economic growth in the medium term.

Portfolio Strategy

  • The Fund had a positive return for the quarter and outperformed the benchmark index (before the effects of sales charges). Key positive contributors to performance included a significant overweight to the information technology sector as well as strong stock selection in information technology, consumer durables, materials and financials. From a country allocation standpoint, overweight allocations to China and Russia benefitted performance.
  • Key detractors to performance were midcap holdings in South Korea and an overweight allocation to Turkish equities. The Fund’s exposure to Brazil and China were increased during the quarter, while the allocation to India was decreased. Fund allocations to Internet and technology hardware holdings were also reduced in the quarter.
  • At the end of the quarter, the Fund’s largest overweight country exposures were in Brazil, Russia, India, China and Turkey. The Fund added to Brazilian financials, energy and consumer-facing names; Chinese financials and autos; Indian energy and autos; and Chilean materials. The largest country and regional underweights are Taiwan, South Africa and Association of Southeast Asian Nations (ASEAN). The Fund’s largest sector overweights are consumer discretionary and information technology, while the largest underweights are in industrials, financials and telecommunication services.

Outlook

  • We believe the outlook for global growth remains strong. Global leading economic indicators continue to flash green. Key Asian exporters continue to show strong activity. This is a positive for commodity producers, and goods and services exporters. Brazil finally exited a deep recession which lasted more than two years. We believe India’s recently implemented GST will lead to stronger growth in the intermediate term.
  • Recently, oil prices have traded in a narrow band, but it is possible we could see supply disruptions tied to: the Kurdistan independence elections, with the potential for Turkey blocking a crude export pipeline; the ongoing economic and political crisis in Venezuela, which could lead to the U.S. blockading the import of Venezuelan crude to U.S. Gulf Coast refineries; and a change in the U.S. stance on the Iranian nuclear agreements, which could push some Iranian crude off of global markets. We expect continued production discipline from OPEC and Russia.
  • As was the case in recent quarters, geopolitical events can lead to temporary volatility. The ongoing struggles to lower the heated rhetoric between the U.S. and North Korea have been difficult to watch. We are hopeful that no serious military actions are initiated by either side. Closer to home, the Trump administration failed to implement a reformulated healthcare plan. Tax, trade and infrastructure policy moves are still on the drawing board. The market is optimistic that lower U.S. corporate tax rates can provide a boost to the economy. The devil is in the details of the proposed tax reforms, and we will be watching this process closely. The reshuffle of China’s standing committee this fall will also impact the Fund’s performance.
  • Emerging market valuations remain attractive as earnings revisions continue to be revised upwards across many regions and sectors. We continue to be overweight new economy stocks (such as Internet, advanced automotive systems, electric vehicles, biosimilars and other technology) as well as consumer discretionary and private bank names. These stocks have performed well year to date and we believe that trend will continue.

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 September 30, 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.