Artemis SmartGARP Global Emerging Markets Equity Fund
Q3 2024 update
Source for all information: Artemis as at 29 September 2024, unless otherwise stated.
Performance
- Q3 relative performance -4.5%. Fund -2% vs MSCI EM +2.5% (in sterling terms)
- Year-to-date relative performance +2.9%. Fund +14% vs MSCI EM +11.1% (in sterling)
- Performance in top quartile vs IA GEM sector for 1,3,5 years and since launch (Apr 2015)
Summary
- China stimulus measures are a game changer.
- Emerging market stocks remain cheap and unloved, with abundant growth and income opportunities.
Market review
The period started in volatile fashion. Softer economic data, muted liquidity and a rapid unwinding of yen carry trades led to sharp downward moves in markets in July. Yet, this malaise proved short-lived, as optimism around easing of monetary policy around the world took hold. By the end of September, the Federal Reserve had initiated its first interest rate cut in years and China stepped in with significant and co-ordinated stimulus measures to support the economy. These events proved supportive for stocks globally, although the significant market reversals in the period were less helpful to our holdings.
Attribution – Previous strong performers fall back
A sharp reversal in strong year-to-date performers and muted returns from EM 'value' stocks (those that trade on below-average valuations) held the fund's performance back during the quarter. We ended the period down 2.0% (in sterling terms) compared to the market rising 2.5%. There were some bright spots. Our holdings in China gained traction in September, with JD.com, Geely, Midea Group and Gree Electric all featuring amongst our top contributors. Elsewhere, more defensive segments such as utilities and telecoms featured positively. Indian Indus Towers and Hungarian Richter all amongst the top contributors.
These were more than offset by losses amongst cyclicals. Cosco Shipping, Amara Raja, Kia and Wiwynn were the biggest detractors to performance. leading the fund to give back some of the strong gains and outperformance it had made over the course of this year.
| Performance (%) | 3 m | 6 m | 1 yr | 3 yrs | Launch |
|---|---|---|---|---|---|
| Fund | -2.0 | 7.0 | 17.5 | 18.6 | 106.2 |
| MSCI EM NR GBP | 2.5 | 7.5 | 14.7 | 1.7 | 61.3 |
| IA Global Emerging Markets NR | 1.4 | 5.5 | 12.7 | -0.5 | 65.2 |
Past performance is not a guide to the future. Source: Lipper Limited/Artemis as at 30 September 2024 for class I accumulation GBP. All figures show total returns with dividends and/or income reinvested, net of all charges. Performance does not take account of any costs incurred when investors buy or sell the fund.
Returns may vary as a result of currency fluctuations if the investor's currency is different to that of the class. Classes may have charges or a hedging approach different from those in the IA sector benchmark.
Activity – Adding to Chinese holdings
Our investment process is designed to deal with volatile market conditions. At times, however, sudden bouts of volatility can hold back performance. We think in these environments it is important to stick to our process and selectively look for opportunities in stocks which have been sold off indiscriminately, rather than make broad changes to the portfolio.
We have had an overweight position in China for several years. Although Chinese stocks have performed poorly overall, our stock selection has been positive. In the last few months, pessimism reached extreme levels and with low investor positioning we felt the risk/reward had become extremely favourable and increased the position. There remains a clear disconnect between share prices and financial performance of businesses in China. As investors remain sceptical about conditions in the economy improving, we believe a disciplined value approach can help unearth great opportunities.
Recent purchases include Alibaba and JD.com. Not long ago, these were consumer darlings and acted as mainstays of many GEM investors' portfolios – today they are heavily out of favour. Yet, in both instances we are seeing catalysts for recovery. In both cases we see superior cash generation and shareholder return policies that are attractive. We also added to our positions in Geely (parent company to Volvo) and drug producer Sino Biopharmaceutical among others.
The result of these changes is that the fund continues to offer an attractive combination of extremely low valuations and attractive growth prospects. As the table below shows, the margin of safety reflected in our China holdings' valuations is significant. Renewed optimism towards the market, should create a favourable support for these positions in future months, yet it will no doubt be a volatile journey. At the end of the quarter, our weighting to China was 34%, compared to the benchmark's 27.8%.
Financial characteristics of our China positions
| Dividend yield | 12m forward P/E | ROE1 | 3m change in earnings | |
|---|---|---|---|---|
| Artemis GEM (China positions) | 5.9% | 8.1x | 10.7% | 3.3% |
| MSCI China | 2.1% | 16.1x | 10.8% | 1.5% |
| Relative | 2.8x | -49.7% | -0.1% | +1.8% |
Alongside our China overweight, in aggregate we remain overweight Brazil, Korea and UAE and underweight India, Taiwan and Saudi Arabia. At the sector level, financials, consumer discretionary, utilities and industrials feature as the largest overweights. Materials, technology and consumer staples the largest underweights.
We remain heavily biased towards value stocks
The fund offers a forward P/E of 7.7 vs 12.4 for the index (a 38% discount). We think our discipline around valuations is likely to be a rewarding strategy for the years ahead. Whilst value stocks in EM have recovered from depressed levels in recent years, the gap in valuations between cheap and expensive stocks remains stretched. This suggests, the opportunity remains. Typically, significant exposure to value stocks coincides with distressed balance sheets and volatile earnings. This doesn’t appear to be the case today, the fund offers favourable quality and growth characteristics. For instance, our net debt/EBITDA is low, and our free cash flow yield is much higher than the market.
EM – Pessimism well reflected in prices; cyclical upturn presents opportunity.
The Chinese economic recovery has so far been underwhelming. Geopolitics creates uncertainty and the US election looms. On the positive side, potential for stimulus measures and reasonable levels of interest rates offer support.
When times are bad, risk aversion can lead to indiscriminate selling. We believe this creates opportunities for disciplined investors and our process has been designed to look for the companies where the fundamentals are signalling good news, yet share prices are not reflecting this optimism.
Chinese stocks have struggled for over a decade and their share prices are well reflective of the risks highlighted. The actions the government has taken recently to provide support to the economy are substantial. Furthermore, this comes at a time where the global economy is not in a bad state. Returns to equities, particularly those in riskier areas could be super charged against this backdrop. We see inflationary pressures and potential upside for commodities and other economically sensitive areas of the market. We believe our holdings stand to benefit significantly in this environment and remain optimistic about the opportunity in the years ahead.
Notes and references
Benchmarks: MSCI EM NR GBP; A widely-used indicator of the performance of emerging markets stockmarkets, in which the fund invests. IA Global Emerging Markets NR; A group of other asset managers’ funds that invest in similar asset types as this fund, collated by the Investment Association. These benchmarks act as ‘comparator benchmarks’ against which the fund’s performance can be compared. Management of the fund is not restricted by these benchmarks.
FOR PROFESSIONAL INVESTORS AND/OR QUALIFIED INVESTORS AND/OR FINANCIAL INTERMEDIARIES ONLY. NOT FOR USE WITH OR BY PRIVATE INVESTORS.
CAPITAL AT RISK. All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in. Any income from the investment is also likely to vary and cannot be guaranteed.
This is a marketing communication. Before making any final investment decisions, and to understand the investment risks involved, refer to the fund prospectus (or in the case of investment trusts, Investor Disclosure Document and Articles of Association), available in English, and KIID/KID, available in English and in your local language depending on local country registration, available in the literature library.
Risks specific to Artemis SmartGARP Global Emerging Markets Equity Fund
- Market volatility risk The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.
- Currency risk The fund’s assets may be priced in currencies other than the fund base currency. Changes in currency exchange rates can therefore affect the fund's value.
- Charges from capital risk Where charges are taken wholly or partly out of a fund's capital, distributable income may be increased at the expense of capital, which may constrain or erode capital growth.
- Emerging markets risk Compared to more established economies, investments in emerging markets may be subject to greater volatility due to differences in generally accepted accounting principles, less governed standards or from economic or political instability. Under certain market conditions assets may be difficult to sell.
- China risk The fund can invest in China A-shares (shares traded on Chinese stock exchanges in Renminbi). There is a risk that the fund may suffer difficulties or delays in enforcing its rights in these shares, including title and assurance of ownership.
Important information
The intention of Artemis’ ‘investment insights’ articles is to present objective news, information, data and guidance on finance topics drawn from a diverse collection of sources. Content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security or investment by Artemis or any third-party. Potential investors should consider the need for independent financial advice. Any research or analysis has been procured by Artemis for its own use and may be acted on in that connection. The contents of articles are based on sources of information believed to be reliable; however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current opinions, expectations and projections. Articles are provided to you only incidentally, and any opinions expressed are subject to change without notice. The source for all data is Artemis, unless stated otherwise. The value of an investment, and any income from it, can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested.
