Investment Update


Investment Update - Ivy Emerging Markets Equity Fund

Commentary as of May 20, 2020

Recently, there has been a renewed focus on the U.S. and China relationship. From your perspective, where do you see opportunities both in terms of countries and sectors?

We generally do not have a high amount of turnover, but in the current market environment, we did initiate some changes in the portfolio. In emerging markets, there are countries such as Taiwan, Singapore, South Korea and China that have handled the pandemic well. Other countries, such as Brazil, have not. As active managers, we believe the coronavirus pandemic can change the economic outcome of countries over the long term. And thus, we have spent time evaluating countries we believe have strong leadership that will allow them to navigate this crisis successfully and emerge stronger once the pandemic subsides.

Over the year, we have significantly lowered our exposure to Brazil. The country saw a severe spread of the coronavirus and lacked medical resources to successfully combat the pandemic. Furthermore, the country has seen some political instability and obstacles in implementing reforms.

Additionally, with the backdrop of bleak demand for energy and the uncertainty regarding the pandemic spread, we lowered our exposure to Russia. At the same time, we have cautiously increased our exposure to China where we are focused on companies that cater to domestic demand. Overall, we are continuing to watch the strategic rivalry between the U.S. and China. In our view, the trade war is far from finished. With this backdrop, we have avoided investing in Chinese technology companies with dependencies on U.S. technology.

In sectors, we have cut exposure to financials as they have been negatively impacted by economic concerns in their markets and declining interest rates. Also, on the backdrop of weak demand in the wake of the pandemic, we are not constructive on the outlook of the energy sector. On the other hand, we are generally overweight home activity companies. These are business models we believe may fare better than others through the pandemic. These companies include video games, e-commerce and food delivery. Also, with long school closures, we believe companies that offer online education services have tailwinds for growth.

Domestically we believe companies with strong fundamentals and resilient end markets are being rewarded in the current environment. In emerging markets, the consensus is for sales to fall by around 4.7% year-on-year vs. Europe where they are expected to decline by around 10%. At the same time, emerging market valuations are relatively attractive compared to alternatives globally. So, is the recent rally in emerging markets also rewarding companies with strong fundamentals and resilient end markets?

Emerging markets have a wide spread of valuations. One key aspect that is influencing valuations is the amount of stimulus we have seen domestically as compared to developing economies. Despite the fractional stimulus in emerging markets, they have held up well and, we believe, this difference will show up in more compelling valuations. Furthermore, we believe countries that have handled the pandemic well and are in the process of re-opening their economies will benefit as economic activity (while still below pre-crisis levels) continues to climb. In terms of sectors, emerging markets have seen a significant transformation with technology and consumers constituting a much larger proportion.

From a bottom-up perspective, there are different cycles at play. Technology has been in an upcycle, and demand for subsectors such as semiconductors, memory and cloud services are strong as additional people work from home amidst the current pandemic. Furthermore, we believe China will accelerate 5G technology spending and this will lead to the development and production of new phones.

In the current lockdown environment, how are you collaborating with company managements around the world?

Communication with management teams is extremely important to our investment process. And while global travel is restricted, we have seen incredible collaboration between companies, central banks and authorities. We have had the opportunity to participate in several highly productive virtual meetings. For instance, we participated in a meeting featuring a former central bank governor and the three largest banks in that country. Additionally, we have conducted several one-on-one meetings with senior management teams cross the globe. For us, the prioritization of these calls and the insight we gain from these calls are a cornerstone of our fundamental process. Combined with our internal daily morning meetings and weekly international call, we believe the dialogue amongst our investment team is stronger than ever.

Past performance is not a guarantee of future results. This information is not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through May 20, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This information 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. Investments in countries with emerging economies or securities markets may carry greater risk than investments in more developed countries. Political and economic structures in many such countries may be undergoing significant evolution and rapid development, and such countries may lack the social, political and economic stability characteristic of more developed countries.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.