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Wasatch Emerging Markets Select Portfolio   

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Q4 2018
Emerging-Market Stocks Played Defense During a Volatile Quarter
by Roger Edgley, CFA, Ajay Krishnan, CFA and Scott Thomas, CFA

“Economic warning signs sent global stock markets reeling during the fourth quarter. Having corrected earlier in the year, emerging-market equities generally held up better than their developed-market counterparts.”

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Economic warning signs sent global stock markets reeling during the fourth quarter. Having corrected earlier in the year, emerging-market equities generally held up better than their developed-market counterparts. The benchmark MSCI Emerging Markets Index fell -7.47% for the quarter. Wasatch Emerging Markets Select portfolios declined less than their benchmark in the final three months of the year.

Data released in mid-October showed China’s economic growth slowing to 6.5% during the third quarter. The weaker-than-expected pace was China’s slowest since the first quarter of 2009. Industrial output and retail sales for November also came in well below expectations, suggesting China’s trade war with the U.S. was beginning to impact the economy. The Beijing government vowed to support future growth by cutting taxes and keeping liquidity ample.

With global demand increasingly reliant on China, export-dependent economies such as Korea and Taiwan faced growing scrutiny from investors. Relative to the benchmark, Korea and Taiwan were sources of outperformance for the portfolios, as our Korean and Taiwanese holdings declined less than the corresponding positions in the Index. In China, our stocks underperformed those in the benchmark.

Worries that a slowdown in global economic growth would crimp demand for fuel sent oil prices sharply lower. Rising supply from the U.S., Saudi Arabia and Russia also weighed on prices as Brent crude tumbled nearly -38% from its four-year high on October 3rd through the end of the quarter.

Cheaper oil was a welcome development in India, which imports about 80% of the oil it uses. The slide in crude prices eased inflationary pressures, which allowed India’s central bank to hold its policy interest rate unchanged. With less Indian currency being sold to purchase oil, the rupee appreciated 4.2% against the U.S. dollar during the quarter, boosting investment returns of assets denominated in rupees. India was a significant source of strength against the benchmark, as our Indian stocks outpaced the Indian positions in the Index and our overweight position in India was a tailwind to performance.

The top-performing country in the benchmark was Brazil. Brazilian stocks soared to record highs after President-elect Jair Bolsonaro pledged to sell dozens of state-owned companies and selected a well-respected economist as his chief economic advisor. The upturn in investor sentiment failed to lift the portfolios’ Brazilian holdings, which tend to be more stable and less sensitive to market swings due to economic news. As a result, Brazil was the portfolios’ greatest source of weakness relative to the benchmark.

Details of the Quarter

India accounted for several contributors to portfolio performance for the quarter—including the top contributor, Bajaj Finance Ltd. Shares of the non-bank financial company rebounded on an easing of the interest-rate pressures that had threatened to increase its funding costs. Longer term, we think the backing of Bajaj Group, the parent company, will provide Bajaj Finance with an advantage over weaker competitors that may find it more difficult to obtain funding.

The second-largest contributor to performance was Vitasoy International Holdings Ltd. A Chinese company, Vitsasoy offers soy milk, tofu, rice milk, tea, juices and related food-and-beverage products in over 40 countries. Earnings per share rose 30% year-over-year in the company’s most-recent reporting period on 22% revenue growth. Management cited improved manufacturing efficiency and favorable trends in commodity prices, particularly sugar and milk powder.

PT Bank Central Asia Tbk was another significant contributor. Indonesia’s largest bank by market value, PT Bank offers both conventional and Shariah-compliant banking services. The company saw its stock price begin moving higher in late October after reporting a 9.9% increase in net profit for the nine months ended September. The stock received an additional boost as improved investor confidence in the Indonesian rupiah sent the currency 3.8% higher against the U.S. dollar during the fourth quarter.

The greatest detractor from portfolio performance for the quarter was International Ltd. ADR. Depositary receipts of the Chinese online travel agent declined amid fears that pressure from competitors may force promotional spending higher at Ctrip and impact earnings. Though we think there is merit to these concerns, we consider them short-term in nature. From a long-term perspective, we think there is little to suggest the company’s business model is broken.

Other significant detractors included Grupo Aeroportuario del Sureste S.A.B. de C.V. (known as ASUR) and Grupo Aeroportuario del Pacifico S.A.B. de C.V. (known as GAP). Both companies operate airports under contracts with the Mexican government. The stocks of these and other holders of government concessions in Mexico have come under pressure after a decision by newly elected president Andrés Manuel López Obrador to scrap a $13 billion airport under construction on the outskirts of Mexico City. The move spooked investors and weighed on the peso, which slipped -4.3% against the dollar during the fourth quarter.

We think these worries are overblown and have found no evidence that Mr. Obrador plans to disrupt the existing concession system in Mexico. In what was widely viewed as a positive development, late in the quarter a majority of bondholders accepted Mexico’s offer to buy back $1.8 billion in debt used to fund the airport’s construction. The peso rose on the news, and shares of ASUR and GAP trimmed earlier losses.


While the collapse in oil prices has eased inflation concerns and brought down interest rates in India, funding remains a key factor for Indian lenders. We believe well-situated firms with ready access to funding are likely to enjoy significant competitive advantages going forward. With investors focused on (and perhaps distracted by) the 2019 Indian elections, we continue to seek out additional opportunities in Indian financials. We recently returned from a research trip to India and anticipate traveling there again as early as February.

China is another country high on our list of priorities. We plan to visit China in January and to devote substantial resources to identifying Chinese companies with attractive potential for investment. In general, we believe that large, dynamic countries such as India and China offer greater opportunity than smaller countries, whose economies tend to be more cyclical and commodity-driven. Although near-term risks in China remain elevated, we think the Chinese government has the means and determination necessary to manage the current slowdown.

Though uncomfortable, recent volatility in equity prices serves the larger and necessary purpose of wringing excesses in sentiment from global financial markets. In emerging markets especially, we believe valuations are nearing levels that bode quite well for future returns. Over time, we believe our active focus on high-quality companies has the potential to generate favorable investment results.

Thank you for the opportunity to manage your assets.



*The MSCI Emerging Markets Index is a free float-adjusted market capitalization index designed to measure the equity market performance of emerging markets. You cannot invest 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 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. (

Earnings per share or EPS is the portion of a company’s profit allocated to each outstanding share of common stock. EPS growth rates help investors identify companies that are increasing or decreasing in profitability.

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 Wasatch Emerging Markets Select portfolios during the quarter. 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 Emerging Markets Select portfolios. 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.