Harding Loevner EM returned over 7% during the third quarter, slightly lagging its index on a total return basis. This underperformance is to be expected during such a large market rally as the portfolio has a relatively low beta. The team maintains its strong risk-adjusted performance posting higher sharpe ratios than the benchmark over 3, 5, and 10 year periods.
Market Overview:
– EM Index was up over 8% on the quarter
o 7 of the last 8 quarters produced positive returns
– China saw macro improvement
o Economic growth remains resilient
o Continued improvement in corporate profits and broad balance sheet improvement
– Energy and metals prices have rebounded
o Copper, nickel, and industrial metals increasing
o Crude prices on the rise
o Also seeing corporate earnings improve across EM
– Strong positive flows into EM continues
o Mainly driven by passive investments
– Similar to global landscape, growth stocks have led superior returns
o Dominated largely by technology related themes
Performance Overview:
– HLMEX was up 7.24% in the quarter slightly trailing the MSCI EM Index
o YTD strong total absolute returns
– Performance was driven by the fastest growing companies as well as the most expensive stocks
o Highest growth quintile and lowest value quintile
– Highest quality names actually underperformed the broader index
o While there was a flight to quality last year, we have seen a flight to growth this year
– Some underperformance has been driven by a bias toward quality rather than growth names
– Similar to growth, highest price momentum names outperformed
o Strong representation of tech names
o Portfolio has some of the names but not the ones currently with most momentum
– Regions with the highest returns included Brazil, Russia, and China
Market Outlook:
– Emerging market performance has been positively affected by tech stocks as the secular shift continues to go from offline to online
– E-commerce and social media
o Online platforms continue to power ahead taking share from offline
– Big data
o Demand for high speed data processing from industries such as autos, AI, social media
– Advanced smartphone features
o Advanced stereo sound, waterproof phone, and advanced camera solutions
– Emerging markets in general are going through a secular change where they are no longer driven primarily by commodities
– The growth in demand for technology has improved company profits and positively driven economic growth in EM