Emerging Markets

LGM Monthly Commentary - February 2020

Volatility spiked materially higher over the month as fears grew over the economic impacts of the global spread of COVID-19.

Volatility spiked materially higher over the month as fears grew over the economic impacts of the global spread of COVID-19. The index fell by 1.6%, while the portfolio underperformed. This relative underperformance may seem unusual given that we tend to outperform in down markets. This can be explained largely by one factor – the surprising resilience of the Chinese equity market, which was the strongest market globally in February, adding 4.2% in AUD dollars as measured by MSCI China index.

At the time of writing, markets have become considerably more volatile after a surprise ‘price war’ erupted in the oil market. This occurred after Russia refused Saudi Arabia’s request to cut supply to support prices. In response, Saudi Arabia said it would increase supply and sell at discounted rates to squeeze out high-cost producers. This sent markets into freefall on March 9th, and the US 10-year Treasury yield below 0.4%, together with oil prices falling 30%. The situation is extremely fluid and changeable on a daily basis.

China’s relative strength has been a puzzle, with February trading volumes 70% above the level for January and 45% above the average monthly level for 2019. A range of government entities, pension plans, sovereign funds, state-owned enterprises and private asset managers have clearly been called upon to perform national service. Retail investors were also active in anticipation of further government support measures; one new A-share fund launched in February raised an unbelievable $17bn in one day alone! Policy in China has also pivoted away from attempts to contain the virus towards re-starting the economy. With the 100th anniversary of the Chinese Communist Party approaching next year, President Xi will be especially keen to deliver on his promise to double China’s 2010 GDP by the end of 2020. This will require growth of approximately 5.6% this year.

So how fast is China getting back to work? Data is mixed – and probably unreliable – but the Chinese economy was estimated to be working at around 60–70% capacity at the end of February, compared with 50–60% in the middle of the month. This is consistent with data suggesting that coal consumption for power plants has reached 68% of pre-holiday levels and that two-thirds of the workforce has returned in the first and second tier cities. Almost 95% of large companies in Shanghai are said to have resumed operations, working at around two-thirds capacity.

The scale of the short-term disruption to China’s economy was laid bare in the manufacturing PMI release, which dropped from 50 in January to 35.7 in February. This is the lowest level ever recorded for this index and its biggest one-month drop. (NB: China’s PMI series has been compiled since 2005; any drop below the 50 level signals a contraction in manufacturing activity). At the company level, data is still sparse and largely anecdotal. We will have to wait until the first quarter or even first-half reporting season to get the full picture. Many companies are likely to experience working capital stress as receivables grow. The banks will step in to fill the gap here. Banks in China have already been instructed not to book virus-related defaults as non-performing loans.

What lies ahead in the coming weeks is highly uncertain and we stress the need for patience. An oil price war comes at a very sensitive time for the global economy as countries battle to contain the virus. The economic fall-out will largely be dictated by the success of containment, but a short-term impairment is inevitable. Within all of this volatility, there may well be some opportunities to buy some great businesses that fall victim to fear. We are watching developments very closely.


This document has been prepared and issued by LGM Investments Limited, authorised and regulated in the United Kingdom by the Financial Conduct Authority, and/or BMO Global Asset Management (Asia) Limited, authorised and regulated in Hong Kong by the Securities and Futures Commission. Any reference to LGM Investments or LGM in this presentation encompasses all subsidiary companies of LGM (Bermuda) Limited (“LGM (Bermuda)”). LGM (Bermuda) Limited is a wholly-owned subsidiary of Bank of Montreal (BMO).

BMO Global Asset Management comprises BMO Asset Management Corp, BMO Asset Management Inc, BMO Global Asset Management (Asia) Limited and BMO’s specialised investment boutiques: Pyrford International Limited, LGM Investments Limited, BMO Real Estate Property, and Taplin, Canida & Habacht, LLC. BMO Global Asset Management is part of the BMO Financial Group, a service mark of Bank of Montreal (BMO).

The views expressed and the information contained in this presentation may be subject to change at any time without notice. This document is intended for the sole use of the intended recipients and its content may not be copied, published or otherwise distributed.

Company information: LGM Investments Limited is incorporated in England and Wales under Registered Number 3029249 and has its registered office at 95 Wigmore Street, London, W1U 1FD. Authorised and regulated in the UK by the Financial Conduct Authority. BMO Global Asset Management (Asia) Limited is incorporated in Hong Kong under Registered Number 325754 and has its registered office at 36/F and Suite 3808, One Exchange Square, Central, Hong Kong. Authorised and regulated in Hong Kong by the Securities and Futures Commission. The above companies are subsidiary companies of LGM (Bermuda) Limited which is incorporated in the British Virgin Islands under Registered Number 49038 and has its registered office at c/o Appleby Services (Bermuda) Ltd. Canon’s Court, 22 Victoria Street, Hamilton HM12, Bermuda.

The analysis and views expressed in this report reflect personal views about the subject and not related to any specific recommendations. The information and statistics in this report have been obtained from sources we believe are reliable but we do not warrant their accuracy or completeness. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. We do not undertake to advise the reader as to changes of our views in the future. This is not a solicitation of an order to buy or sell any specific securities. These products or services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. This presentation is for informational purposes only and should not be construed as an offer to sell, a solicitation to buy, or a recommendation for any security, or as an offer to provide advisory or other services in any jurisdiction in which such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction. © LGM Investments

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