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Over the last quarter, global markets were up about 3%. But it’s a really a tale of two regions if you want to call it that: the US was up by 7% but at the other end of the spectrum, emerging markets went down 2%. So, there’s a really large spread between the outcomes for the different regions.
The other thing that characterized the market over the last quarter was rate hikes. The Fed has been talking about rate hikes for a while but the markets are starting to believe there is going to be a lot more of them in 2019.
10-year yields push up and that flowed through to US dollars, which also ultimately affected emerging markets over the quarter.
The most recent quarter was a challenging quarter. Our focus on Asian stocks has weighed on the performance as Asia & EM underperformed.
We don’t have much exposure to the US given the Fund has a focus on Asian as well as small and mid-cap stocks, and this was a headwind. Risk was reduced in the Fund through fewer stocks and smaller sizing, combined with hedging out some regional and currency risk for some positions in India and Hong Kong.
Indian banks in particular had a challenging period as we were long a company called Indian Bank. The Indian government has set off a forced merger between some of the good banks and some of the bad banks, forcing the good banks to take on the bad banks.
We were long one of the good banks, thinking that they would do well out of credit growth. Unfortunately, this fear of all the good banks being saddled with bad banks has weighed down on the stock and our position in Indian Bank was stopped out towards the end of the month. A continuous weakening rupee and this announcement proposing to merge three public sector banks in an attempt to consolidate the banking sector in India came as a negative surprise to the market.
All previous commentary from the government had said that consolidation would be determined by the banks themselves, not imposed. Indian financials were also weak over the past few weeks as the Reserve Bank of India has started a crackdown on governance issues related to private sector banks.
One of the stocks who did very well last quarter was a company called SCI (Service Corp International), which is the US’ largest listed funeral business. In a world of uncertainty death is a fairly certain outcome, something markets usually appreciate.
We bought some shares of SCI after last quarter when the stock hadn’t rallied yet. Over the first half of the year, the share price had suffered the headwind of a 25% de-rating in PER terms even though EPS continued to grow by circa 15%. Q2 results, reported at the end of August, were more profitable than expected and this was a catalyst for a strong rebound in the share price. It has gone up 20 or 30% in the last quarter, which has been a positive outcome for us.
If we take a step back and look at the whole overall market outlook, we think we can observe competing forces taking place. Real growth and real GDP look good, particularly in the US and at the same time, interest rates are going up. These two forces are fighting each other since when real growth is good, equity is generally still okay but high interest rates make for a headwind.
Increasing US interest rates are showing little signs of abating as the US Federal Reserve sees a tight labour market and good growth. As such, we expect continued downward pressure on Emerging Markets’ currencies and upwards pressure on the US dollar – to carry on.
The divergence between a strong oil price, higher commodities, higher expected growth, yet weaker Emerging Markets (which normally do better into this backdrop) does not exactly follow what we thought would be a 1998/99 US-led growth playbook, as commodities were falling back then.
Overall, we are somewhat bullish but we temper that bullishness with the risk to interest rates.
During the quarter, our newest funds the Trium Morphic ESG L/S Fund is a finalist for the Award for Innovation (Funds) selected by Investment Week for the Sustainable and ESG Investment Awards 2018.
And our other two Funds have been nominated in the AsiaHedge awards for best performing Fund and New Hedge Fund of the Year in Asia.
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