This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Michael Kerley manager of the Henderson Far East Income investment trust reviews goings on in emerging markets over the past month.
Asian markets posted a modest gain in July as strong US and European economic data and more measured comments from the US Federal Reserve regarding quantitative easing calmed investors' nerves. Emerging markets continued underperforming their developed counterparts with currency weakness from negative fund flow and deteriorating current account balances continuing to weigh heavily on returns. South-east Asian markets were hit particularly hard with Indonesia, Thailand and Malaysia all posting negative returns with weak currencies a major factor. India also suffered the same fate despite government policies designed to tighten liquidity and underpin the rupee. With the exception of Taiwan, North Asia outperformed with Hong Kong, China and Korea leading the way boosted by greater exposure to US and European improvement. At the sector level global cyclicals outperformed, with energy and materials leading the way. Domestic-orientated defensives such as consumer staples were the laggards.
The portfolio underperformed over the month as investors focused on global cyclicals and exporters where we are generally underweight. Yielding equities also came under pressure as improving global growth prospects and a steepening yield curve reduced the attractiveness of equity dividends over bonds and cash. The strength of Chinese shares was beneficial but more than offset by the weakness in Thailand and Taiwan.
During the month we sold our position in Taiwanese smart phone manufacturer HTC over fears of slowing demand and reduced our position in Spreadtrum Communications as the share price neared the offer price. The proceeds from these transactions were used to acquire a new position in Mega Financial in Taiwan.
We remain positive on Asia in the medium to long term owing to strong economic fundamentals and compelling valuations. In the short term however, we expect markets will be dictated by the strength of the recovery in the US and China and speculation over the ending of quantitative easing. The portfolio remains domestically-focused with a bias towards companies with dividend growth as the valuations of some traditional yielding sectors have become quite stretched.
