Wasatch Emerging India Fund® (WAINX)  Invest in this Fund 

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3Q18
Earnings Were a Bright Spot as Rising Oil Prices Pressured India’s Currency and Stock Market
by Ajay Krishnan, CFA and Matthew Dreith, CFA

“Domestic consumption and healthy loan demand continued to boost corporate earnings, which also stand to benefit as the combined impacts of a cash ban and the introduction of a nationwide goods-and-services tax fade from year-over-year comparisons.”

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Performance for the Institutional Class prior to 2/1/2016 is based on the performance of the Investor Class.  Performance of the Fund's Institutional Class prior to 2/1/2016 uses the actual expenses of the Fund's Investor Class without any adjustments. For any such period of time, the performance of the Fund's Institutional Class would have been substantially similar to, yet higher than, the performance of the Fund's Investor Class, because the shares of both classes are invested in the same portfolio of securities, but the classes bear different expenses.

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For the period ended September 30, 2018, the average annual total return of the Wasatch Emerging India Fund for the 1-year, 5-year and since inception periods were -0.33%, 18.57% and 10.53%. The returns for the MSCI India IMI Index were -2.40%, 10.67% and 1.95% respectively. Expense ratio: Gross 1.73%.  

Data shows past performance, which is not indicative of future performance. Current performance may be lower or higher than the data quoted. To obtain the most recent month-end performance data available, please click on the “Performance” tab of the individual fund under the “Our Funds” section. The Advisor may absorb certain Fund expenses, without which total return would have been lower. Investment returns and principal value will fluctuate and shares, when redeemed, may be worth more or less than their original cost.

Wasatch Funds will deduct a 2.00% redemption proceeds fee on Fund shares held 60 days or less. Performance data does not reflect the deduction of fees, including sales charges, or the taxes you would pay on fund distributions or the redemption of fund shares. Fees and taxes, if reflected, would reduce the performance quoted. Wasatch does not charge any sales fees. For more complete information including charges, risks and expenses, read the prospectus carefully.

Wasatch Funds are subject to risks, including loss of principal.

Overview

Rising oil prices weighed on Indian equities during the third quarter, halting an advance that took the country’s major stock averages to all-time highs in August. Returns measured in U.S. dollars were lower, as India’s currency depreciated -5.6% against the greenback. The benchmark MSCI India Investable Market Index (IMI) fell -4.30% for the quarter. Trailing its benchmark, the Wasatch Emerging India Fund—Investor Class lost
-7.49%.

Strong household spending and a pickup in manufacturing helped India’s gross domestic product (GDP) expand 8.2% year-over-year in the April-to-June quarter according to a report released by the Statistics Ministry at the end of August. India’s GDP growth was its most rapid since the first quarter of 2016 and the fastest pace among the world’s major economies. Domestic consumption and healthy loan demand continued to boost corporate earnings, which also stand to benefit as the combined impacts of a cash ban and the introduction of a nationwide goods-and-services tax fade from year-over-year comparisons.

Surging economic activity stoked demand for imported goods and petroleum products in India, which imports about 80% of the crude oil it uses. India’s oil bill swelled further during the third quarter as the price of Brent crude rose on fears that U.S. sanctions on Iran will shrink global supplies. Following a rout in the currencies of Turkey and Argentina, developing countries with current-account and fiscal deficits faced mounting scrutiny from investors. India’s currency, the rupee, came under renewed pressure in September after a report showed that higher oil prices had pushed the country’s quarterly current-account deficit to its widest in five years. On a more-positive note—unlike in 2013—India now has a much larger supply of foreign-exchange reserves.

The combination of higher oil and a weaker rupee drove retail prices of diesel fuel and gasoline to record highs in Mumbai, fanning fears of inflation and raising concerns about prospects for Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) in upcoming elections. International investors in particular reacted to heightened uncertainty and the rupee’s decline by selling Indian stocks and bonds.

Energy was the top-performing sector of the Index, followed by information technology (IT). The cyclical, capital-intensive nature of the energy business doesn’t fit well with our focus on high-quality companies, however, and our lack of exposure to the energy sector was a headwind for the Fund. The Fund’s underweight position in the strong IT sector also hurt performance relative to the benchmark.

Details of the Quarter

The strongest contributor to Fund performance for the quarter was Divi’s Laboratories Ltd. The company manufactures active pharmaceutical ingredients (APIs) and intermediates. Because Divi’s derives most of its revenues from exports, the company benefits from declines in the rupee against other currencies. Standalone net profit at Divi’s rose 51% in the company’s most-recently reported quarter on 22% revenue growth compared to the same quarter a year ago.

Page Industries Ltd. was the second-best contributor. The company manufactures and sells Jockey-branded undergarments in India, Sri Lanka, Bangladesh, Nepal and the United Arab Emirates. Page is also the exclusive licensee for the manufacture, marketing and distribution of the Speedo brand in India. Shares of Page rose sharply in August after the company reported a 46% increase in quarterly net profit on 17% revenue growth versus the year-ago period. The inclusion of Page in the MSCI India Domestic Index as of August 31st also helped lift the stock.

For much of the third quarter, Bajaj Finance Ltd., a non-bank financial company, was among the Fund’s top contributors to performance. Late in the quarter, however, Bajaj’s stock was caught up in a contagion resulting from difficulties experienced by a few Indian financial firms, which caused investors to become cautious on the entire financials sector. Despite this headwind to the stock, Bajaj Finance has been experiencing secular demand growth driven by increased financialization, favorable demographics and a cultural shift away from extended-family living arrangements. Consolidated profit after tax surged 81% year-over-year in the company’s most-recent quarter on a 39% increase in revenue from operations. We believe Bajaj Finance is creating significant headroom for future growth through its innovative use of technology to expand the markets it serves, and we’re comfortable with our position at its current weight.

The greatest detractor from Fund performance for the quarter was MakeMyTrip Ltd. (MMYT). The company operates the leading online travel agency in India. MakeMyTrip saw its stock price decline in August after management reported mixed quarterly results. The stock fell further on concerns of increased competitive intensity in the airline-ticketing and hotel-booking segments. We think these fears are overdone. In our view, MakeMyTrip’s strong market position and the financial backing of South Africa-based Naspers Ltd. make the company an unlikely target for competitors seeking to gain market share.

Other third-quarter detractors included Gulf Oil Lubricants India Ltd. and Byke Hospitality Ltd. Gulf India offers automotive and industrial lubricants and greases. Profit after tax in the company’s most-recently reported quarter rose 17% compared to the same quarter a year ago on a 39% increase in revenues. Despite strong demand across Gulf India’s business segments and overall volume growth of 33%, its stock declined amid worries that the rising price of crude oil may impact future profitability. Based on past patterns, however, we think the company may benefit in the long run as it passes

along its higher costs to customers and maintains those higher prices after the price of crude declines.

Byke operates hotels and resorts in India. Shares of Byke languished as the company reported a year-over-year decline in quarterly sales and profits. With little indication that management will be able to reverse the negative trends, we’ve decided to move on. (Current and future holdings are subject to risk.)

Outlook

As fears of contagion from the currency crises in Turkey and Argentina ripple through emerging markets, the currencies of India and other countries are being tested. The Indian government has a number of tools at its disposal to combat the rupee’s decline. In September, the government announced a series of planned measures that included raising tariffs on non-essential imports, facilitating overseas borrowing by the manufacturing sector and making it easier for banks to issue rupee-denominated bonds outside India. A news report indicated the Reserve Bank of India (RBI), India’s central bank, was considering a facility to allow oil companies to purchase U.S. dollars directly from it instead of on the open market.

Another option being considered is the issuance of Non-Resident Indian (NRI) bonds to wealthy Indians living abroad. The government used NRI bonds to raise approximately $34 billion in 2013. Authorities also tapped Indians living overseas in 1998 and 2000 to stem declines in the rupee.

Even-stronger measures include direct intervention in currency markets as well as interest-rate hikes. Though the RBI has been a heavy seller of dollars in recent months as it seeks to smooth volatility in the rupee, foreign-exchange reserves remained at a healthy level. Because the RBI targets inflation, not the exchange rate, the rupee’s impact on interest-rate policy is uncertain. Consumer-price inflation eased to 3.69% in August—the lowest since October 2017.

In many respects, India’s current situation is much less dire than the situation back in 2013 when there was a so-called “Taper Tantrum” surrounding the U.S. Federal Reserve’s decision to curtail (taper) bond purchases that were keeping interest rates artificially low. Despite that and other difficult periods in the recent past, the Wasatch Emerging India Fund—Investor Class generated an average annual total return of 10.53% from its inception on April 26, 2011 through September 30, 2018. Over that same period, the MSCI India IMI Index generated an average annual total return of 1.95%.

Moreover, the Indian economy is largely driven by domestic demand and tied less to exports and global supply chains. With tariffs on Chinese exports to the U.S. posing threats for China and its trading partners, we think India’s relatively closed economy offers attractive opportunities for international investors seeking to reduce exposure to global risks.

Thank you for the opportunity to manage your assets.

Sincerely,

Ajay Krishnan and Matthew Dreith

 

The MSCI India Investable Market Index (IMI) covers all investable large, mid and small cap securities across India, targeting approximately 99% of the Indian market’s free-float adjusted market capitalization. You cannot invest directly in this or any index.

Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indexes. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties or originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.msci.com)

CFA® is a trademark owned by CFA Institute.

The Wasatch Emerging India Fund’s investment objective is long-term appreciation of capital.

Gross domestic product (GDP) is a basic measure of a country’s economic performance and is the market value of all final goods and services made within the borders of a country in a year. 

The MSCI India Investable Market Index (IMI) covers all investable large, mid and small cap securities across India, targeting approximately 99% of the Indian market's free-float adjusted market capitalization.

 

You cannot invest directly in indexes.

View the Emerging India Fund’s most current Top 10 Holdings

Portfolio holdings are subject to change at any time. References to specific securities should not be construed as recommendations by the Funds or their Advisor.

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