Emerging Markets update
March 7, 2017
By Edward Lam, Lead Fund Manager
Money and currency are very strange things.
They keep on going up and down and no-one knows why;
If you want to win, you lose, however hard you try.
– Gilles Li Muisis, Abbott of Tourna (c.1349)
Emerging markets continue their upward drift despite what the skeptics guess about Trump’s policies and impact. We wrote about this in December.
In the meantime, we continue our policy of selective buying. We repeat what we wrote last month and we continue to think the market has an upward long-term bias. However, we must also now raise the issue that we are back within range of the 2010 euphoria levels. We are therefore at a critical junction, which will likely determine the gradient, volatility and longevity of this bull market.
Within the fund, we have had a mixed set of results from companies we are invested in. Cia Cervercerias Unidas (CCU), a Chilean Beer and fast moving consumer goods (“FMCG”) company, reported stronger-than-expected results, with consolidated volumes up 8.6% for the fourth quarter of 2016. This helps to justify our decision to add to the stock whilst the share price was weak at the end of 2016.
Unfortunately, results have gone in the opposite direction for Eurocash S.A., one of the more recent additions to the fund and one in which we have built a small position. Sales grew by 5.9% overall in the fourth quarter and 4.5% for 2016, but a core segment of the business, its cash and carry division, saw -5.2% like-for-like results driven by a tight competitive environment and price deflation. The effect of this and higher costs from expansion into the fresh food market caused annual profits to decline by 17.5% for the year. Management remains confident of turning the business back to profit growth this coming year. We are encouraged by the company’s active investment in its new fresh product line, which will add another dimension to the advantage it already has in market share and scale in FMCG, so we still like this as a long-term investment. Meanwhile, the company’s long-term capital management and current cash flow are sound; it is not intending to cut its dividend.
Finally, for the fund, one of the current issues is the imbalance of currencies that the fund has exposure to. Put in stark terms, swings in the more volatile currencies like the Brazilian Real and the South African Rand continue to explain a great portion of relative over- and under-performance. Whilst to do anything solely based on a currency view would be to lose the diversification of stock picking, to ignore the currency in portfolio construction risks missing out on the greater portion of this interest rate cycle driven rally in emerging markets.
|Historical performance, as at February 28, 2017||1 year||3 year||5 year||Since inception*|
|Redwood Emerging Markets Dividend Fund, Series F||16.94%||5.95%||5.80%||4.24%|
|Redwood Emerging Markets Dividend Fund, Series A||15.89%||4.88%||4.73%||3.22%|
*Inception date: November 5, 2010
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