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Wasatch Emerging Markets Small Cap Portfolio   

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Q1 2019
Mainland China’s Markets Bounced Back in the First Quarter
by Ajay Krishnan, CFA, Dan Chace, CFA, Roger Edgley, CFA, Andrey Kutuzov, CFA, Scott Thomas, CFA and Kevin Unger, CFA

“The sudden turnaround—which tends to be characteristic of these markets—is clearly a sign that investor sentiment toward Chinese stocks has improved.”

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For the first quarter of 2019, Wasatch Emerging Markets Small Cap portfolios outperformed the benchmark MSCI Emerging Markets Small Cap Index,* which gained 7.76%.

Emerging-market equities struggled in 2018 but got off to a strong start in 2019, helped by a dovish shift in U.S. monetary policy and the prospect of additional economic stimulus in China.

While our investment approach isn’t driven by economic forecasts, we do take macroeconomic factors into account. Our primary focus is on analyzing the growth prospects of individual companies. In emerging markets, we look for stable businesses benefiting from secular trends tied to a country’s long-term development.

Despite recent volatility, company fundamentals are generally stronger today than they were five years ago. Emerging-market stocks are attractively valued and are trading at discounts to their developed-market peers. The emerging-market asset class has continued to grow and broaden.

We continue to be upbeat about investment opportunities in select markets. In the first quarter, we believe that investors’ heightened concerns about the pace of global growth boosted the appeal of our portfolio companies, which we see as high-quality businesses capable of long-duration growth. We believe last year’s market weakness drove valuations in emerging markets down to levels that bode well for future returns. Ongoing and sustainable economic development within emerging-market countries, increasing innovation, and more service- and knowledge-based companies all make investing in emerging markets increasingly attractive to investors. As emerging markets continue to make structural improvements, we expect them to benefit more from domestically driven sectors, and depend less on commodities and exports. Wasatch continues to see strong earnings and attractive returns on equity among our portfolio companies.

The emerging-markets universe represents a large human population and 25 countries undergoing substantial political and economic change. The BRICS (Brazil, Russia, India, China and South Africa) no longer represent a majority of the MSCI Emerging Markets Index—as Brazil, Russia and South Africa have diminished in importance. India and North Asia have become more dominant. Inclusion of China’s A-shares in the Index should create more opportunities for global investors.

Further, technological changes are also creating attractive opportunities. Internet-based businesses are flourishing and companies are employing technology to achieve workplace efficiency and to grow their businesses. Wasatch expects emerging markets to continue to be attractive places to invest.

Details of the Quarter

India was the top contributor to portfolio performance on an absolute basis and relative to the MSCI Emerging Markets Small Cap Index for the quarter. India is the largest country weighting in the portfolio and the portfolio is significantly overweight versus the Index. For the quarter, the portfolios’ holdings substantially outperformed those in the benchmark in a positive market.

We continue to believe that the macro backdrop for investing in India is structurally positive with business-friendly reforms allowing for more growth. Indian companies appear to be adjusting to the new reality following the implementation of reforms such as the nationwide goods-and-services tax (GST). India is in a growth phase that we expect could continue for the next 20 to 30 years. The breadth of interesting, high-quality companies we have been finding is vast across sectors. We believe that the transformation in the financialization of the economy and technological initiatives are significant drivers for growth.

Two of the portfolios’ top contributors for the quarter were from India. Info Edge India Ltd. and ICICI Lombard General Insurance Co. Ltd. Info Edge is a leader in online classified advertising including areas such as job recruitment, matrimony, real estate and restaurant review/food delivery. The company has produced strong growth as the internet has been changing business in India more dramatically than it has in developed markets. We believe the company has substantial headroom for growth as the Indian market is in the early stages of shifting from print to online advertising. In other markets, we have seen dominant providers of online classified ads demonstrate consistent growth and they are extremely difficult for competitors to dislodge.

ICICI Lombard is one of the largest private-sector general insurers in India. The company offers motor-vehicle, health, home, travel and other types of insurance coverage. An upswing in India’s insurance cycle continued to benefit ICICI Lombard and other insurance companies. Gross direct premium income (GDPI) at ICICI Lombard grew 25.9% year-over-year in the company’s most-recently reported quarter compared to 13.6% growth in GDPI for the industry as a whole.

In our prior letter, we commented on the disparity in performance between the markets of India and China in 2018. The MSCI China Index was down over -20% in U.S. dollar terms for calendar year 2018, while India’s market, as represented by the CNX Nifty, otherwise known as the Nifty 50 Index, was down just over -5% in U.S.-dollar terms.

The first quarter of 2019 has seen a big bounce back for mainland China’s markets. The CSI 300 Index returned over 30% in U.S.-dollar terms for the three months ended March 31, 2019. In contrast, India’s Nifty 50 Index gained 7.5% for the first quarter. To put some context around the spring-back for China’s markets, the SSE Composite Index hit 5,166 in mid-June 2015. As of year-end 2018, the SSE stood at 2,494, a descent of more than 50% over three-and-a-half years. In that time, stock valuations were driven down with the result being that stocks traded on both the Shanghai and Shenzhen exchanges are now more reasonably valued. The SSE Composite Index has an attractive estimated forward price/earnings ratio of around 12, with an estimated forward price-to-book ratio of around 1.5. The sudden turnaround—which tends to be characteristic of these markets—is clearly a sign that investor sentiment toward Chinese stocks has improved. Mainland China’s markets are retail-driven and prone to bubbles, with the government making periodic interventions.

The portfolios’ holdings in China significantly outperformed those in the benchmark for the first quarter. The portfolios weight in China is in line with that of the Index. The top contributor to portfolio performance for the quarter was Vitasoy International Holdings Ltd. A Chinese company, Vitasoy offers soy milk, tofu, rice milk, tea, juices and related food-and-beverage products in over 40 countries. The company continues to report very strong earnings. Management cited improved manufacturing efficiency and favorable trends in commodity prices, particularly sugar and milk powder.

Taiwan was another large contributor to portfolio performance for the quarter. Taiwan’s significant integration into China’s global supply chain had previously hurt the stocks of Taiwanese companies, especially those in the semiconductor industry, over the course of last year as concerns about China’s economic growth moved to the forefront. As the trade talks between China and the U.S. appeared to be moving forward and China’s equity markets recovered, some affected Taiwanese stocks rebounded.

Several of the portfolios’ top contributors for the quarter were from Taiwan, including Win Semiconductors Corp. We consider Win to be a high-quality compound semiconductor foundry. The company manufactures gallium arsenide (GaAs) wafers for original equipment manufacturers. GaAs are the dominant semiconductor technology for mobile devices. The deployment of 5G user equipment and network infrastructure is expected to increase Win’s growth in 2020 and beyond. Win also provides optoelectronic device fabrication services for optical communication and 3D sensing applications. Demand has been particularly strong for 3D sensing, which is increasing and diversifying the company’s growth profile.

Douzone Bizon Co. Ltd. was the portfolios’ largest detractor for the quarter. Douzone Bizon is the leading accounting software and enterprise-resource planning (ERP) provider in Korea with a clear dominance among small to medium-size businesses. The company has been benefiting from the structural transition from desktop to cloud software products, which has led to a pickup in growth, margins and returns on capital. The company competes with SAP and Oracle for the business of large Korean corporations. Douzone Bizon continues to roll out new products to expand its market. The company’s ERP business has been more volatile than expected and earnings were below expectations, but we expect the ERP segment to become more consistent over time. We believe the company remains an attractive long-term holding.

While Brazil added to portfolio returns for the quarter, our top contributor for the fourth quarter of 2018 as well as the year gave back a small portion of its gains and detracted for the first quarter of 2019. Magazine Luiza S.A. operates consumer-electronic stores in Brazil and has put in place strong information-technology infrastructure to make the business an e-commerce player using its stores as showrooms and mini-distribution centers.

Muangthai Capital Public Co. Ltd. also detracted from performance for the quarter. The company provides various lending services in Thailand. There had been some uncertainty around pending regulation of non-bank financial companies in Thailand, and the effect it might have on current interest rates and fees, but this has been substantially resolved.


After the negative performance of emerging markets in 2018—the worst performance in a decade—2019 is off to a better start. We saw some positive factors at the end of 2018 that could help emerging markets this year. Among them: the U.S. Federal Reserve lowered its projections for future interest rate hikes, the potential for a trade deal between the U.S. and China, and the inexpensive value of emerging-market stocks compared to those in developed markets. On the first factor mentioned—Fed rate increases—this has been less of a risk. Expectations of a trade deal have been in the background lately, and given the sentiment emanating from China’s A-share markets it has been discounted. The relative inexpensiveness of emerging-market stocks has clearly helped returns early in 2019.

The last decade, which started in 2009 just after the global financial crisis, was a disappointing one for emerging markets. Although the MSCI Emerging Markets Index had an average annual total return of 8.94% for the 10-year period ended March 31, 2019, it underperformed other measures of global stock-market performance. In our view, the long-term case for investing in emerging markets remains attractive.  The story of emerging markets is partly a growth one as well as a broadening and deepening of the capital markets in these less-developed regions of the world. We have seen the bond markets in emerging countries receive steady inflows of capital and bond prices have appreciated, which help to stabilize currencies in general. Internal politics for some countries like Turkey have significantly damaged their currency. When we look back, emerging-market equities have been less affected by the politics within countries.

Over the past decade, a strong U.S. dollar and U.S. equity market have not supported strong U.S.-dollar returns for emerging markets. The outperformance of the U.S. equity market means that the U.S. is at its historically highest market capitalization as a percentage of world market capitalization at around 55%. Part of the attraction of the emerging-markets universe as an investment destination is the growth and potential returns of individual emerging-market countries, supported by stable currencies. We see the relative attractiveness of emerging markets, especially compared to Europe and the U.S., as being stronger today as the economic outlook for many developed nations has weakened. The ever-present risks for emerging-market assets—a strong U.S. dollar and inflation within emerging markets (and developed markets)—are diminishing. The U.S. market has been driven largely by technology issues and the continued outperformance of tech stocks is subject to some real challenges—both social and regulatory.

We see the outlook for emerging markets as a lot more positive relative to many other world markets. In the swoon at the end of 2018, emerging markets decoupled from the developed world going down less. More good news for emerging markets is that many currencies have stabilized against the U.S. dollar. Lower inflation is supportive of domestic consumers in emerging-market countries. China’s economy has seen definite signs of weakness with global supply chains looking to reconfigure and become less reliant on China. This is positive for countries like Mexico and Vietnam.

In India, there are some concerns around the upcoming national elections, which have suppressed the market somewhat. We expect that when the elections are complete investors will be better able to focus on the strong business momentum and fundamentals that we see every day in our bottom-up research of individual Indian companies. The Wasatch research team’s recent visit to India supported this view. For Indian companies, recently reported earnings growth has been very strong. We believe the structural reforms that have been set in place are solid and unlikely to be derailed by whoever comes into power.

Taiwan bounced back strongly in the quarter, a beneficiary of improving investor sentiment on technology and the semiconductor cycle. Strong performers among portfolio holdings included Win Semiconductors (mentioned earlier) and Chroma ATE, Inc., which makes test equipment for a wide range of technology manufacturing including battery testing.

We continue to see a significant set of new companies being listed in emerging markets—ranging from health care to internet companies. Structurally, the emerging-market universe is becoming more diverse across sectors and we are seeing more companies that are knowledge based and that have valuable intellectual property. All of these are positive factors that support the future of emerging-market equity investing and the long-term growth of companies in these markets.

Thank you for the opportunity to manage your assets.


*The MSCI Emerging Markets and Emerging Markets Small Cap indexes are free float-adjusted market capitalization indexes designed to measure the equity market performance of emerging markets. You cannot invest in these or any indexes.

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 indices. 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. (

China A-shares, along with B-shares, are sold on mainland China’s two stock exchanges, which are in Shanghai and Shenzhen. The key difference between A-shares and B-shares is that A-shares are denominated in mainland China’s currency, the renminbi, and B-shares are denominated in foreign currency (U.S. dollars in Shanghai and Hong Kong dollars in Shenzhen).

The “cloud” is the internet. Cloud-computing is a model for delivering information-technology services in which resources are retrieved from the internet through web-based tools and applications, rather than from a direct connection to a server.

The CNX Nifty, also called the Nifty 50 or simply the Nifty, is the National Stock Exchange of India’s benchmark index for the Indian equity market.

CSI 300 Index consists of the 300 largest and most liquid A-share stocks. The Index aims to reflect the overall performance of China A-share market.

Earnings growth is a measure of growth in a company’s net income over a specific period, often one year.

Gross direct premium income (GDPI) is a statement of the money that an insurer has earned from premiums and eliminates any money that is or will be paid out elsewhere from those premiums.

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 China Index captures large- and mid-cap representation across China H-shares, B-shares, Red chips, P-chips and foreign listings (e.g. ADRs). With 469 constituents, the Index covers about 85% of this China equity universe. Currently, the Index also includes large-cap A-shares represented at 5% of their free float adjusted market capitalization.

The price-to-book value ratio is used to compare a company’s book value to its current market price.

The price/earnings (P/E) ratio, also known as the P/E multiple, is the price of a stock divided by its earnings per share.

Return on equity (ROE) measures a company’s efficiency at generating profits from shareholders’ equity.

The SSE Composite Index, also known as the Shanghai Composite Index, is a stock market index of all stocks (A shares and B shares) that trade on the Shanghai Stock Exchange.

Valuation is the process of determining the current worth of an asset or company.


This commentary is intended to provide you with information about factors affecting the performance of the Wasatch Emerging Markets Small Cap portfolio during the month. References to individual companies should not be construed as recommendations to buy or sell shares in those companies. Wasatch analysts closely monitor the companies held in the Emerging Markets Small Cap portfolio. If a company’s underlying fundamentals or valuation measures change, Wasatch will reevaluate its position and may sell part or all of its holdings.

Past performance is not indicative of future results.

CFA® is a trademark owned by CFA Institute.