Markets ended 2019 on a high with the Emerging Market Index adding over 3% (in AUD), although the portfolio trailed in the period. The big news fanning market performance in December was a material de-escalation in the US-China trade dispute, where both sides agreed to a “phase one deal”, which provided a strong tailwind for equities into the year-end. Perhaps a trade “truce” is a more apt description given that the detail around several elements of the agreement (particularly in relation to intellectual property and technology transfer) remains sparse at best. That said, further tariffs have been avoided for now while the US will roll back certain measures in exchange for increased agricultural purchases by the Chinese. There is little doubt the dispute is harming global trade so this rollback is certainly welcome.
The year as a whole was a decent one for emerging market equities, notwithstanding the material increase in volatility and moderating GDP growth. The portfolio’s benchmark closed the year up nearly 19%, led by a 23% jump in China. But even this pales beside the 31% return generated by the S&P 500. Elections, protests, trade wars and interest rate policy were just some of the key events driving markets in 2019, but the trade war obviously had the biggest impact on sentiment overall. More recently we now have the US-Iran conflict to contend with.
Anta Sports (Chinese sports apparel), HDFC Bank in India and Universal Robina (Philippines food & beverage) were the chief drags on relative performance in December; however, none of these were notably weak in absolute terms, nor was there much by way of news flow. Anta was a real standout performer in 2019, up nearly 90% for the full year, so the marginal weakness in December is likely due to some profit taking. Not owning Samsung Electronics was a drag on relative performance as the stock rallied 10%, while some of the portfolio’s Indian holdings also underperformed. The Indian market has been somewhat subdued in 2019 in comparison to the wider emerging market rally. While the resounding election win by the BJP in May was welcomed, we have seen a notable deceleration in economic growth, with the most recent quarter GDP numbers posting a disappointing 4.5%. 2019 was a tougher year for the economy, not at all helped by a crisis in the non-banking financial sector, which has seen lending dry up. This problem should diminish in the next twelve months while there are expectations for the government to crack on with a robust investment programme.
On the upside, the portfolio’s relative return benefitted from its holdings in Sands China (gaming), Bank Mandiri (Indonesia), Mr Price (South African apparel retail) and Prosus (Naspers spin-out listed in Amsterdam). December was very much a “top down” month, driven by exuberance surrounding the trade talks and probably a little year-end window dressing. The type of portfolio we hold typically struggles in this sort of environment.
We added a position in Wizz Air to the portfolio in the month. Wizz Air is an ultra-low cost carrier that has become the number 1 airline in Central and Eastern Europe. They have ample room to continue to grow: underpenetrated regions with high travel propensity and that have attractive GDP per capita growth, together with a sector that is still structurally growing even in high penetration markets. Wizz also benefits from a ‘virtuous cycle’ where a dominating cost positioning translates into low prices, which then leads to high load factors and efficiency, further improving Wizz’s cost position.