Give some examples of how corporate engagement has made a difference
We wrote to Vale’s board of directors and met with representatives of their executive team to express our concerns regarding balance sheet deterioration in light of falling commodity prices and significant capital expenditure commitments. Subsequently, Vale announced plans to make more serious commitments to strengthen its balance sheet, which may include selling stakes in its Tier-1 assets. We also took the opportunity to urge the commodities giant to consider moving to a single class of voting shares. Meanwhile, Magnit will start to report in its functional currency of the rouble, in addition to the dollar. We had previously engaged with the Russian retailer over the issue and welcome this improvement in financial transparency.
What have you been doing with the portfolios?
Since the start of the year, we have sold our position in South32 after it rallied on better-than-expected results. The stock was previously spun off from BHP Billiton. We also trimmed our stakes in Ayala Land, Banco Bradesco, SABMiller and Vale following strong relative performance. Conversely, we topped up on Magnit’s locally-listed shares and also the shares of Siam Cement, which were trading at attractive valuations.
Market Realist – Though emerging markets (FEO) have rallied somewhat in the current year, there are still some possible headwinds that warrant caution from investors. Investors should be extremely selective in choosing the regions they want to invest in. As we discussed in previous parts of this series, emerging markets in Asia (GRR) look fundamentally strong. In particular, India (IFN), Indonesia (IF), and China (GCH) show room for growth.
Russia (RSX) and Brazil (EWZ) could continue to struggle in the medium term with economic growth. Brazil’s economy contracted for the fifth consecutive quarter in 1Q16, falling by 0.3% over the quarter, bringing the year-over-year growth rate to -5.4%. The OECD has lowered its forecasts for the economy, citing corruption and political problems as the reasons. The OECD estimates the Brazilian economy will contract by 4.3% in 2015. The deep spending cuts that the interim government plans to put in place are likely to exacerbate this issue, at least in the short term. Russia is also likely to show tepid growth. Russian manufacturing activity remains in contraction territory with the May PMI estimate coming in at 49.6.
Commodity price and currency fluctuations are likely to stay a concern in the long term. A tighter monetary policy by the Federal Reserve, Chinese yuan devaluations, or the reappearance of slumping oil prices (USO) could all be headwinds for EM (emerging market) equities. Other geopolitical events like the “Brexit” could be reasons for concern in the long term. All these factors could result in volatility for EM equities, and thus should be carefully considered by investors.