Cullen Emerging Markets High Dividend: January 2019 Commentary

Fund Update
January 2019 Print article
Rahul Sharma Fund Manager

Summary Comments:

Emerging markets (EM) equities began 2019 on a positive note, after a significantly weak 2018, and closed up 8.75% for the month. January saw all major global equity markets bounce back strongly. EM equities outperformed both the developed markets (MSCI EAFE) index, which was up 6.61% for the month, and also the United States market (S&P 500), which rose 8.01%. China was the biggest contributor to EM equities performance in January as the government’s fiscal stimulus announcements and the PBOC’s (People’s Bank of China) decision to cut interest rates and increase liquidity drove markets higher. China’s GDP growth rate for 4Q2018 at 6.4% y/y was down marginally q/q, but in‐line with expectations. EM equities also reacted positively to US Fed’s indication of a pause in its monetary tightening policy, after four straight quarters of rate hikes. The trade and tariff tensions between the US and China that dominated much of 2018, also showed signs of easing. While no deal has yet been worked out, the two countries appeared to be working closely to arrive at an amicable solution. The MSCI EM Currency Index strengthened by 2.57% during the month, with the currencies of South Africa, Brazil, and Chile experiencing the most pronounced appreciation, while India weakened the most. EM Latin America (+14.96%, MSCI EM Latin America) was the best‐performing regional index, followed by EMEA (+10.81%, MSCI EM Europe Middle East and Africa Index) and Asia (7.31%, MSCI EM Asia). Oil rebounded sharply during January, ending the month at $53.791 per barrel with 18.50% gains, as OPEC and Russia initiated supply pullbacks with Saudi Arabia also ensuring export cuts. Industrial metals (S&P Industrial Metals Spot Index) closed up 5.28% for the month as all major metals gained significantly led by zinc and nickel, on account of likelihood of trade tensions relief and fiscal stimulus announcements by China.

The top country performers in January were Turkey, Brazil and Russia. After experiencing material weakness in 2018, Turkey’ strong rebound was led by a relatively calm geo‐political environment and stability in its currency. Brazil’s performance was also driven by an appreciating currency, in addition to continued optimism around economic reforms under the new leadership of Jair Bolsonaro. Russia posted a budget surplus in 2018, a first since 2011, according to a preliminary estimate by its Finance Ministry. The Russian ruble was also among the top EM currency performers in January. The weakest country during January was India as higher oil prices drove markets down. The India rupee was the weakest among major EM currencies during the month. From a sector perspective, the top EM performers were consumer discretionary, real estate, and energy. Conversely, materials, healthcare and consumer staples were relative underperformers during the month.

Performance:

The fund appreciated 8.23% during January, which represents underperformance versus the benchmark (MSCI EM Index, +8.75%) of 0.45%. Historically, the fund has outperformed in flat and down markets, and participated meaningfully in strong up markets. The top country contributors were Taiwan, Thailand and Mexico. Stock selection and allocation both contributed in Taiwan, where the fund is underweight and the local market underperformed the benchmark. Stock selection was the main contributor in Thailand and Mexico, where the fund is largely in‐line with the benchmark. Detracting countries included South Korea, Brazil and Vietnam. In South Korea and Brazil, stock selection detracted while in Taiwan, the fund’s overweight allocation hurt the fund’s relative performance during the month. On a sector basis, the top contributors were the fund’s stock selection within energy and allocation in consumer staples, while both allocation and stock selection contributed within real estate. Conversely, the top detractors were the fund’s allocation and stock selection within financials, utilities and communication services.

Best Performers:

  1. AES Tiete (Brazil, Utilities) – Shares of AES outperformed in January on the back of a global equity market rally led by a strong rerating in Emerging Market equities. Earlier in the month, Renova Energia SA rejected AES’ bid for the 400 MW Alto Sertao III wind power complex and 1.1 GW of wind projects which was viewed favorably by investors. We remain confident in the company’s ability to diversify its portfolio to move into higher margin wind and solar projects and reduce dependency on hydrology.
  2. PLA Administradora Industrial (Mexico, Real Estate) – Shares of the company outperformed on the back of strong growth prospects in the industrial real estate sector in Mexico. Market participants were encouraged that the company will not require additional equity in the short‐term. Moreover, Mexican interest rates appear to be close to peaking, which makes shares attractively priced as Terrafina offers a 10% dividend yield. Shares are trading close to record low valuations with a 26% discount to its NAV.
  3. Times China Holdings Limited (China/ HK, Real Estate) – Shares of the company outperformed during the month as a result of continuing rally in the property sector since the last quarter of 2018. The government also cut its RRR earlier in the month as part of other easing measures. This set a favorable stage for property developers given that the crackdown on shadow banking had inevitably squeezed liquidity out of the market. We remain confident that the company will continue to deliver strong sales and earnings growth.

Worst Performers:

  1. Power Grid Corp. (India, Utilities) – Share of the company underperformed during the month after a strong rally last month as a result of the government’s tariff announcement in line with expectations. While the regulatory overhang was removed, the stock de‐rated ahead of earnings given that investors are still concerned about capitalization relative to capex. We remain confident in the company’s pipeline of projects and believe that it will remain the market leader given its superior execution skills.
  2. Vale SA (Brazil, Materials) – The stock underperformed during January as a result of a serious accident at the company’s tailing dam of its Feijao mine, located in Brumadinho, Minas Gerais. This is similar to the impact from the events at Samarco, although the estimated mine waste spillage at the Feijao mine is much lower. While business impact from the disaster in terms of production losses is unlikely to be significant, the event and its aftermath could render Vale’s cash flows, dividends and share buy‐backs unpredictable. In light of this news, we are reviewing our position in Vale.

Thank you for your continued support.

Cullen Capital Management LLC