Lazard Emerging Markets Fund 2Q Commentary 2021
Market Overview Equity markets in the developing world advanced in the second quarter on investor con dence that the global economic recovery will continue uninterrupted despite the emergence of considerable in ation risk. is was due to supply-chain bottlenecks, a surge in commodity prices, and sharp increases in China’s factory-gate prices. Investors were increasing worried that stimulus measures, combined with post-pandemic economic recoveries, would result in a signi cant rise in global in ation, which, in turn, could force key central banks to retreat from their accommodative monetary policies. In June, the Federal Reserve increased its expectations for short term in ation but not for mid and long-term in ation. In the quarter, the MSCI Emerging Markets Index advanced 4.9%, raising its year-to-date gain to 6.3%. (Index returns are net of fees and in pound sterling terms.) Latin America was the best performing region in the quarter, with Brazil’s stock market surging, thanks to the jump in raw materials prices and increasing demand. is was somewhat o set by controversial and ultimately unsuccessful legislation in Chile and Colombia and the election of leftist presidential candidate Pedro Castillo, in Peru. Mexico’s stock market performed decently following President Andrés Manuel López Obrador’s reasonable showing in the country’s midterm elections. e region encompassing Europe, the Middle East, and Africa (EMEA) also outperformed the broader market index, with Russia’s stock market bene ting from the rise in oil prices. Better coronavirus results and strong European demand helped equity markets in the Czech Republic, Hungary, and Poland. Egypt’s stock market languished, as economic growth continued to be scarce. Greek shares bounced on optimistic economic expectations, especially for tourism. Emerging Asia was a relative laggard on concerns about Chinese corporate earnings growth potential, as the country’s economy confronts a series of headwinds, including soft domestic demand, rising raw material prices, and global supply chain disruptions. Additionally, Chinese government legal and regulatory measures have made investors more guarded about powerful industry leaders. Indonesia’s stock market was harmed by increasing coronavirus infections and regional lockdowns. Despite some heightened COVID-19 infection fears, the Taiwan’s equity market continued to perform well. Healthcare, industrials, and energy were the best performing sectors in the month. In contrast, real estate, communication services, and utilities all underperformed the broader market benchmark.
Portfolio Review During the quarter, the portfolio underperformed the MSCI Emerging Markets Index, which rose 4.9% in pound sterling terms. Helped • Stock selection in the health care and consumer staples sector had the most positive attribution over the period as well as Hong Kong and Brazil • Shares of Pet Center Comercio e Participacoes, a Brazilian seller of pet products, rose nearly 50% in 2Q21, as growth in digital and physical stores exceeded expectations • Banco BTG Pactual, a Brazilian Financial services company focusing on investment banking and wealth management, reported strong Q1 numbers with its wealth management division notching record in ows of new money • Shares of Chinese e-commerce company, Alibaba, bene ted from the outperformance of growth in June and recovered some of the losses incurred earlier in the year from Anti-trust nes • Shenzhou International, a Chinese clothing manufacturer, rose on the back of a stronger-than-expected demand recovery globally and less-than-expected negative impact over concerns of forced labor in Xinjiang to source cotton Hurt • Stock selection in the information technology, communication services, and materials sector were negative as well as China, Tawian, and South Korea • Despite strong fundamentals in its fourth quarter FY2021 results, HDFC Bank, an Indian nancial services company, declined after the outage of its mobile banking app a ected selected customers. Shares recovered in May but were again under pressure as rising COVID-19 cases negatively a ected market sentiment. Shares also felt pressure after the Reserve Bank of India imposed nes on them for de ciencies in regulatory compliance • ICBC, a Chinese state-owned bank, traded lower along with the broader nancial industry in China and Hong Kong as Huarong Asset Management, China’s biggest distressed debt investor, missed a deadline to report earnings and su ered its rst credit rating downgrade • 21Vianet Group, China’s largest provider of carrier-neutral internet data center services, declined as part of the market-wide sello for Chinese technology names in May. Shares seemed to bottom at the end of May, showing signs of recovery as they reported rst quarter 2021 earnings that slightly outpaced analyst estimates. In their earning call, the company gave guidance for strong demand and acceleration in the second half of the year from cabinet growth which has seen utilization increase from 15k to 25k in annually from 2021-2023 • New Oriental Education, a Chinese provider of private educational services, declined after China’s Ministry of Education implemented new rules for the private tutoring industry, dictating where and when classes can take place, as well as the fees charged by education companies and what advertisements could be used. Across many sectors, increased Chinese regulation has been a theme of 2021 and like Alibaba, Meituan, and DiDi, New Oriental Education saw its share price su er
Recent Activity and Trade Rationale Over the period, we purchased Realtek Semiconductor, a developer of integrated circuits in Taiwan, Cemex, a building material company in Mexico, and Chinia Mengniu, a dairy product manufacturer based out of Hong Kong. We sold out of Largan Precision, a designer of optical lenses in Taiwan, Shenzhen Sunway Communication, a Chinese manufacturer of mobile terminal antennas, Gruma, a Mexican corn our and tortilla manufacturing company, and Ternium, a steel product manufacturer in Argentina.
Outlook e pace of recovery globally has varied widely, but with vaccinations trending higher and a restart for global capital expenditures, we expect emerging markets to continue to recover in the second half of this year. In emerging markets, in ation is also trending up, pushed by a combination of pandemic-related uncertainty, supply bottlenecks and logistical issues, and higher energy prices. e return of in ation is generally a good sign for economic growth, and therefore, good for emerging markets equities–particularly those with the highest levels of operating leverage.
Important Information All data contained herein are sourced by Lazard Asset Management or af liates unless otherwise noted. This is a nancial promotion and is not intended to constitute investment advice. The Emerging Markets Fund is a sub-fund of Lazard Investment Funds, an Open Ended Investment Company (OEIC) which is authorised in the UK by the Financial Conduct Authority (FCA). The Authorised Corporate Director of the fund is Lazard Fund Managers Limited, which is authorised and regulated by the FCA and is a member of The Investment Association. Copies of the full Prospectus, the relevant Key Investor Information Document (KIID), the Supplementary Information Document and Report and Accounts are available in English, and other languages where appropriate, on request from the address below or at www.lazardassetmanagement.co.uk. Investors and potential investors should read and note the risk warnings in the prospectus and relevant KIID. There can be no assurance that the Fund's objectives or performance target will be achieved. Any views expressed herein are subject to change. Past performance is not a reliable indicator of future results. The value of investments and the income from them can fall as well as rise and you may not get back the amount you invested. Fluctuations in the rate of exchange between the Fund's base currency, the currency of the Fund's investments, your share class and the currency of the country in which you live may have the effect of causing the value of your investment to diminish or increase. Any yield quoted is gross and is not guaranteed. It is subject to fees, taxation and charges within the fund and the investor will receive less than the gross yield. The securities markets may be less developed in emerging/developing markets and there is a greater risk that the Fund may experience delays in buying, selling and claiming ownership of its investments. In addition, emerging/developing markets may also face more political, economic or structural
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challenges and there is a higher risk that the Fund may not get back the money invested. The information provided herein should not be considered a recommendation or solicitation to purchase, retain or sell any particular security. It should also not be assumed that any investment in these securities was or will be, pro table. Issued and approved in the United Kingdom by Lazard Asset Management Limited,50 Stratton Street, London W1J 8LL. Incorporated in England and Wales, registered number 525667. Lazard Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Certain information included herein is derived by Lazard in part from an MSCI index or indices (the "Index Data"). However, MSCI has not reviewed this product or report, and does not endorse or express any opinion regarding this product or report or any analysis or other information contained herein or the author or source of any such information or analysis. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any Index Data or data derived therefrom. The MSCI Index Data may not be further redistributed or used as a basis for other indices or any securities or nancial products. References to Director and other titles are Lazard internal titles and may not imply any legal status or responsibility. The contents of this document are con dential and should not be disclosed other than to the persons for whom it is intended.