00:00:00:00 - 00:00:30:07
Unknown
Hi, I'm Tom Harvey, senior equity specialist, and welcome to Aberdeen's Quarterly Emerging Markets Fund podcast. Today we'll look at a few areas, including what happened as we rounded out 2023 across the asset class, what that meant for the fund and the fund's relative performance. How we're positioned within the Aberdeen Emerging Markets Fund and what we expect as we continue to move through 2024.

00:00:30:09 - 00:00:54:04
Unknown
I think it will come to no surprise that as 2023 rounded out emerging markets as an asset class, lagged, developed market equities and did so quite substantially when looking at the index level. Some of this had to do with what constitutes bigger portions of emerging markets, and some of this, of course, had to do with what was driving developed markets.

00:00:54:04 - 00:01:22:21
Unknown
And you look specifically at the strength of the Magnificent Seven in the United States and what that meant for developed market indexes. And certainly as we look across emerging markets, we look no further than the biggest constituent of that index, which is China, which ultimately disappointed as we move through 2023, falling around 11% while the emerging markets index rose closer to 10%.

00:01:22:23 - 00:01:51:13
Unknown
That actually meant a few things. That meant that other parts of emerging markets did pretty well, and I think that's easy to miss that given the backdrop of a smaller rise across the asset class. As we take a look at what that meant for the fund, I think we'll note a few things here. As the year rounded out and 2023, the fourth quarter actually saw some pretty strong markets across the asset class.

00:01:51:13 - 00:02:20:10
Unknown
And in part this had to do with risk assets coming back. I think there was a lot of hope and expectation that as we look at central bank actions and in particular where a lot of investors focus, which is what will happen in the United States with regards to the Fed and their path forward, we saw, of course, that there was some expectation that maybe interest rate hikes were done by the Fed, that is, we weren't going to see anymore in 2023.

00:02:20:10 - 00:02:45:04
Unknown
And in fact, maybe we would start to see pretty early on in 2024, the Fed start to cut rates. Now as the US economy has perhaps done a bit better by pushing back expectations into later this year about interest rate cuts. But certainly in the fourth quarter of 2023, we did see a major rally in risk assets and that included emerging market equities.

00:02:45:06 - 00:03:10:14
Unknown
The fund performed roughly in line, lagging a little bit in the fourth quarter of 2023, although we certainly recognize that the fund did lag a bit more substantially over the full year of 2023. In the beginning of last year, we were expecting and probably it happened later than we thought that the US maybe done hiking rates and that this might mean good things for other asset classes outside of the United States.

00:03:10:17 - 00:03:35:02
Unknown
We also expected that the number of really good secular tailwinds would bolster the outlook for many emerging market countries. And a lot of this has to do with capital expenditures and exactly where those investments will go. And pleasingly, we did see some real positives across a number of not only our holdings but across a number of markets in emerging markets.

00:03:35:04 - 00:03:57:22
Unknown
The third thing we did expect it was really quite disappointing, though, was to see a gradual recovery in China as China began to reopen late in 2022 and to 2023. We thought that this would be continued gradual recovery. And of course what we saw last year helping to lead to that 11% decline in Chinese assets over the course of the year was continued disappointment in China.

00:03:57:22 - 00:04:31:06
Unknown
And, you know, that has perhaps changed a little bit in this last month or so here early in 2020 for but ultimately still really waiting to see if this has legs and if the government will actually perhaps provide enough stimulus to encourage the investors, both foreign and domestic, to continue to invest in China, but then also to perhaps do enough to encourage the domestic consumer in China and help give them the confidence to be out spending a little bit more.

00:04:31:08 - 00:04:57:03
Unknown
So from a fund standpoint on that relative basis, as we look at the full year, our stock selection within China and exposures to Hong Kong, which is off index, really weighed on the fund and its relative performance. We're underweight China compared to the index on a direct basis by about 6%. However, we have that exposure to Hong Kong, which is about 4%.

00:04:57:03 - 00:05:26:14
Unknown
And so even so, we're slightly underweight if you count both of those countries, towards what that weight looks like in the index in China. But ultimately, we saw disappointing stock performance coming out of China. And our holdings in Hong Kong also fell quite sharply. I would argue a lot of this has to do with those holdings which are more domestically focused and therefore a bit more reliant on that recovery of the domestic consumer, where we felt most of that pain.

00:05:26:16 - 00:05:58:22
Unknown
Pleasingly, we did see some very good stock selection coming out of other parts of emerging markets. We also saw some positive effects from our allocation that is being either over or underweight certain areas. Most notably there is the overweight for Latin America that we have within the fund. We did also see some very good stock selection across both Brazil and Mexico from a standpoint of sectors and how they performed, perhaps a bit of a mixed bag over the course of a full year.

00:05:59:02 - 00:06:24:18
Unknown
But we did see some very strong performance out of our semiconductor holdings. And so, you know, from the largest stock that we hold within this fund by weighting Taiwan Semiconductor, very strong performing stock over the course of the year. But I would also note to off benchmark holdings that are within that same sector, both happened to be located in the Netherlands, outperforming pretty significantly.

00:06:24:18 - 00:06:49:18
Unknown
And so I think those trends early in 2023 of artificial intelligence helping to drive markets and helping to drive some of these semiconductor businesses. But also that risk on sentiment towards the end of the year was quite a positive for a number of of these types of holdings. We look at consumer discretionary from a sector standpoint. This is where the portfolio felt most of its relative pain.

00:06:49:20 - 00:07:13:17
Unknown
From a sector standpoint. And it's really within this sector that we see a lot of that exposure to the Chinese domestic consumer. The thing I'll say about China, we've been quite cautious from a positioning standpoint about adding too much to China.

00:07:13:17 - 00:07:38:21
Unknown
Our overall weight in China came down throughout the year as it did within the index. Also. But we have maintained much of the exposure that we have in China. We have some instances of perhaps taking a stock or two out and replacing with a different holding. But we look at a lot of the holdings that we have within China and we saw some very good earnings growth in 2023.

00:07:38:23 - 00:08:03:15
Unknown
The earnings in this portfolio for Chinese stocks rose 37% over the course of 2023. And yet we saw collectively our holdings in China fall 22%. So what we ultimately see, of course, then is that valuations continue to look very attractive and have done nothing but get cheaper. We've seen some positive stock movements as we move through February of this year.

00:08:03:17 - 00:08:31:20
Unknown
We've seen some positive messaging from the government. We're not, I guess, necessarily convinced that perhaps enough has been done yet to be able to state that things have turned and we'll start to see some better times in the near term for China. So we do remain at that slight underweight position. But fundamentally, I think importantly for us, these holdings that we have in China are still performing very well.

00:08:31:22 - 00:09:01:08
Unknown
So from a positioning standpoint, we haven't necessarily changed a whole lot from a standpoint of where we have overweight. So I think about sectors, we're still overweight. I.T and overweight financials is two of the bigger sectors in the index, but also importantly within this fund from a country standpoint, we have built up a little bit our exposures in India, but India also performed quite well over the course of 2023.

00:09:01:08 - 00:09:35:17
Unknown
And so we're about index weight there in India and we do maintain that overweight position in Latin America and importantly, seeing some very good positive trends in places like Mexico that we'll talk about as we look at that outlook. Now, we're quite positive as we move now out of 2023 into 2024 for emerging markets. And I would point to just a few areas that we think will help in the near term, but also are pretty good longer term potential drivers for success of emerging markets.

00:09:35:19 - 00:09:59:12
Unknown
Some of this is monetary policy and what we're looking at here is, you know, where does inflation sit in the emerging world and where are interest rates in the emerging world? We have seen that in many cases, inflation has peaked in a lot of these countries across emerging markets. And that even late into last year, we saw that central banks in emerging markets were able to cut rates.

00:09:59:14 - 00:10:20:04
Unknown
And the expectation this year is that potentially that continues. That doesn't have to go hand in hand with the Fed. But I think we would point out here the ability of the Fed to cut interest rates probably does allow for greater flexibility in a number of these emerging market countries to perhaps cut or perhaps at a faster pace.

00:10:20:04 - 00:10:47:15
Unknown
So certainly keeping an eye on on monetary policy, again, both in the United States, but also across emerging markets. We're continuing to look at this idea of of capital expenditures and the positives that this means for emerging markets. And so as we look, we see a number of drivers that, again, are both near-term and longer term that ultimately should help emerging market economies.

00:10:47:15 - 00:11:32:02
Unknown
And so we look at the idea of green transition and whether this is really happening tomorrow with with how we're able to change up the way that power is generated and supplied, that doesn't matter too much. The important part is you do see that companies and economies are committed to trying to reduce their their carbon emissions. And so the different types of metals that are necessary to further electrification are found typically across emerging markets would give you the example of copper and the importance in Latin America of copper and just how under supplied that material is.

00:11:32:04 - 00:11:59:09
Unknown
Talked a little bit about Mexico before. And the idea here that companies that have exposure within their supply chain to China are looking for ways to at least diversify away from this a little bit given the close ties with the United States, Mexico has been a big beneficiary of this idea of near shoring or a reshoring. What we in particular have seen is a huge pickup from a construction standpoint and nonresidential starts.

00:11:59:09 - 00:12:40:05
Unknown
And so the positive here is you're seeing lots of investment go into this country and it's been a real positive for the financial sectors, for any sectors that are associated with infrastructure. And just generally speaking, this is a real positive for Mexico as we think about their economy. We talked a little bit before about artificial intelligence, but this idea of a technological revolution, more and more things connected the idea of AI starting to drive what companies are doing and where they're spending a lot of the component makers that are very necessary for a lot of these processes happen to sit in emerging markets and a lot of them, of course, in Northern Asia.

00:12:40:05 - 00:13:03:20
Unknown
So real positives for economies like Taiwan and like Korea. And we expect that this is a near-term positive, but this is also a great longer term trend for emerging markets. And the last thing I'll point out has to do with valuations. And of course, I mentioned that as Chinese stocks have grown their earnings, but their prices have fallen, This, of course, makes them look even cheaper.

00:13:03:22 - 00:13:30:09
Unknown
We do see pretty attractive valuations, though, even across broader emerging markets. Right. China looks very cheap today. Places like India have historically always looked a bit more expensive. But I think if you are willing to do your homework, if you're willing to be discerning and be active, you can certainly find pockets within various countries, within various sectors where you find very attractive valuations.

00:13:30:09 - 00:14:25:04
Unknown
And I think importantly, compared to develop markets, emerging markets do look very attractively value today. So I want to just thank you for joining the Aberdeen Emerging Markets Fund podcast and we look forward to your participation Again, this podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for informational purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research.

00:14:25:06 - 00:14:51:01
Unknown
The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen. The companies discussed in this podcast have been selected for illustrative purposes only or to demonstrate our investment management style and not as an investment recommendation or indication of their future performance. The value of investments and the income from them can go down as well as up an investor's, make it back less than the amount invested.

00:14:51:03 - 00:14:59:05
Unknown
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