There are two broad drivers of the emerging market equity asset class: global growth and US dollar liquidity. Neither of these drivers were supportive over the year as a whole. Besides flagging global growth, the inherent strengths of the US economy relative to the rest of the world, combined with the asymmetric impact of the US-China trade war, have kept investors more optimistic about US assets and/or more pessimistic about the need to have sufficient US dollar-denominated assets. This has happened despite the enormous increase in the US fiscal deficit, which represents a huge drain on global dollar liquidity. The net effect of this has been a resumption of the uptrend in the US dollar relative to other global currencies that began in 2011 and which has been a major headwind for the asset class in recent years. The slide in growth and tight liquidity have been transmitted into emerging economies, with negative GDP growth revisions in almost all of the 26 emerging market economies represented in the MSCI Emerging Markets index during 2019.

Set against this demanding market backdrop, our Global Emerging Markets Opportunities (GEMO) and Emerging Markets Small Cap (EMSC) strategies outperformed their benchmarks over the year while our Global Emerging Markets strategy (GEM) trailed the index.

The GEMO strategy takes an assertively top-down, country-focused approach to emerging markets investing, with the team placing significant emphasis on making the right country allocation calls. This is complemented by a stock selection process that focuses on identifying quality growth stocks trading at reasonable prices within favoured countries.

Unusually, stock selection rather than country allocation decisions accounted for the bulk of the portfolio’s outperformance over the year, with South Korean, South African and Mexican holdings adding material value in the portfolio, more than offsetting weakness in Indian and Taiwanese positions. The strategy enjoyed healthy total net flows of £49 million over the year, some of which was raised in the US where the strategy’s mutual fund vehicle passed through the US$500 million mark.

India remains a market where the team sees significant potential and is one of the largest active overweights in the portfolio. Conditions are in place for growth to accelerate over the next two years, helped by the potential for an uptick in the credit cycle. Indian bank ICICI was the portfolio’s best performer, albeit overall stock picking in India was negative, with Indiabulls Housing Finance and consumer stock Mahindra and Mahindra both being laggards.

The Prague-based GEM strategy had a challenging year as stock selection weighed on returns, particularly within the financials and industrials sectors, the latter being affected by disruptions in some of the most relevant global supply chains. This cancelled out an excellent showing by the portfolio’s consumer discretionary names, such as Cyrela Brazil Realty and Anta Sports Products. This bottom-up strategy has a flexible, all-cap growth style and aims to identify companies demonstrating strong and improving operational performance, focusing particularly on changes in earnings momentum.

The Emerging Markets Small Mid Cap strategy, also managed by the Prague team, employs a distinctly bottom-up stock-picking approach aiming to find growth companies that have the potential to develop world-class products or become industry leaders in their local market. The strategy enjoyed strong performance over the period, as good stock selection easily outweighed modestly negative sector allocation effects. Consumer and financial holdings, such as Bata India, the largest retailer and leading manufacturer of footwear in India, added notable value.

The portfolio has become more defensive in recent months. The team have increased exposure to healthcare and consumer names, particularly domestic-orientated Chinese brands. Trade concerns continue to play on investors’ minds and have dominated headlines for some time. More domestically-focused names have seen a re-rating as a result, and the portfolio continues to benefit from holdings in this area.