Lazard Emerging Markets Equity I (LAZ0003AU) Report & Performance

Share prices across almost all emerging markets rebounded in July after ending the second quarter in a somber mood. The MSCI Emerging Markets Index recovered by 4.9% in Australian dollar terms, breaking a five-month trend of underperformance relative to developed markets. Positive returns were seen across all regions, with Eastern Europe and Asia both rising more than 4% while Latin American stocks rallied over 3%. Highlights during the month included public statements by senior Chinese leaders confirming the importance of foreign investors and supporting the real estate sector. The period also witnessed general commodity price strength and modest currency weakness versus the US dollar.

In Europe, the Middle East and Africa, Turkish and South African equities were particularly strong. Despite further currency weakness, a 250- basis point interest rate increase implemented by the Turkish central bank coupled with the announcement of more orthodox monetary policy and plans for continued credit tightening prompted investor buying. South African equities performed well on optimism over increasing Chinese demand and improving trends in energy management. Egyptian shares fell by 2.9% as Russia ended an agricultural deal with Ukraine, a measure likely to further strain Egyptian food subsidies.

In Asia, Chinese equities rebounded more than 9% as investor optimism returned to the internet platform industry after more positive government statements regarding large fintech companies and the real estate sector. In general, interest in Asian shares increased after considerable pessimism in the second quarter. Rebounds were recorded in equities in Malaysia and Thailand, while South Korea sustained gains after periods of underperformance. Returns in India, while still positive, were mundane as technology share prices were more restrained. Taiwan stocks fell slightly.

All Latin American markets witnessed gains during the month. Strong crude oil and commodity prices helped most markets particularly in Colombia and Peru, where double digit returns were recorded. Brazilian, Chilean, and Mexican stock prices rallied on positive sentiment over potential increases in Chinese demand.

Ongoing concerns over global economic growth restrained financial returns in the developing world during the second quarter of 2023. Regions that saw easing inflationary pressures, particularly in Eastern Europe and Latin America, recovered strongly, posting net returns of 20.3% and 14.8% respectively. Asian markets proved to be somewhat disappointing, falling by 0.2% in the period.

Chinese equities fell by 9.2% as shares of some of the internet platform companies saw continued sell off. Thai and Malaysian stocks suffered a similar setback, hurt by concerns over currency. South Korean and Taiwanese shares fared better, aided by interest in new alternative intelligence (AI) applications which resulted in positive performance by information technology stocks. The best performance in the region was seen in India where investors remain optimistic about the economic outlook.

All Latin American markets finished the quarter higher and many, by a considerable measure, helped by lower inflation trends and the potential for declining interest rates. Strong energy stock performance helped equities in Brazil and Colombia, while Peruvian shares recovered mostly due to decent earnings results. Mexican stocks rallied on general investor optimism over currency and economic stability.

Eastern European shares enjoyed a robust rebound in the quarter as investors witnessed easing inflationary pressures that fueled optimism for a regional economic recovery. The clearest sign was observed in Poland and Hungary, the markets which had been adversely affected by the Russian invasion of Ukraine. Greek stock prices also rose markedly, following a general election that saw incumbent Kyriakos Mitsotakis win a minority victory. In neighboring Turkey, President Recep Tayyip Erdogan was also re-elected and successfully reappointed respected former Economy Minister Mehmet Simsek to his cabinet. While this was generally viewed as positive by investors, it may require an economic adjustment, a concern that sent markets to a meaningful retreat.

Emerging markets equities rose modestly in May in Australian dollar terms amid mixed economic signals. Asia, and Latin America, both finished more than one percent higher. Stocks fared worst in Europe, the Middle East and Africa (EMEA), dropping by about 4%. Commodity prices fell significantly in May, adding downward pressure on producers.

Technology company shares in South Korea and Taiwan rallied in May, fueling gains in Asia, amid new excitement over artificial intelligence and ChatGPT trends. That helped counter the weakness seen in other parts of the region which stemmed from concerns over China’s slower-than-expected economic recovery. Chinese internet platform stocks also fell on mixed revenue and profit trends, while Malaysian equities slumped on weaker crude oil prices.

In Latin America, Argentina and Brazil outperformed, while Colombian equities were weighed down by lower commodity prices, especially crude oil. Peruvian shares also fell.

Eastern European, Middle East and African markets were impacted by several factors in May. South African shares were hit by ongoing political tensions, commodity price pressures and power outages, all of which hurt the rand. In Turkey, President Recep Tayyip Erdogan surprised commentators by eking out a close-fought victory in the elections. In Greece, stocks got a boost from Prime Minister Kyriakos Mitsotakis’s stronger-than-expected election victory, albeit resulting in a minority government.

Contributors to Performance:

▪ Shares of South Korean semiconductor manufacturer SK Hynix and Samsung Electronics, a manufacturer of electronic consumer products and semiconductors, both rose on expectations that the memory industry is bottoming, and that the proliferation of artificial intelligence (AI) servers could help the transition to double data rate 5 memory chip known as DDR5 and help clear inventories.
▪ Quanta Computer, a Taiwanese manufacturer of notebook computers, is also expected to benefit from AI datacenter investments and the company recently outlined its growing auto electronics business.
▪ MediaTek, a Taiwanese fabless semiconductor company, recently launched a new Dimensity product for the auto market and formed a partnership with NVIDIA to help penetrate the auto market.

Detractors from Performance:

▪ Shares of BB Seguridade, a Brazilian insurance company, saw profit-taking after a period of strength.
▪ Shares of Galp Energia, a Portuguese energy company with exposure to Brazil and Africa, declined along with the slump in crude oil prices.
▪ Ping An Insurance, a Chinese insurance company, also experienced prof-taking after a brief rally in the share price.

Ongoing concerns over geopolitics and US banking health resulted in unexciting returns across global equity markets in April. In emerging markets, negative market sentiment was renewed over possible further US sanctions on China and the outlook for Chinese internet platform stocks. The MSCI Emerging Markets index closed the month little changed in Australian dollar terms, weighed down by declines in parts of Asia. Stocks in Eastern Europe, the Middle East and Africa (EMEA) and Latin America rose by 5.4% and 4.1% respectively, offsetting losses elsewhere.

The underperformance in Asia was also driven by the share price weakness of technology stocks in Taiwan and internet platform equities in China. Most of the other Asian markets saw stock prices rise. This was most true in Indonesia and India, where equity prices finished 8% and 5.6% higher respectively, helped by currency stability and optimism about the nations’ economic direction.

Most Latin American markets witnessed stronger equity prices over the month. Chilean share prices closed little changed on the difficult political situation. In Colombia, the market finished higher even as political tensions rose and the country’s president, Gustavo Petro, appeared frustrated by the process.

Decent earnings results coupled with stronger currency movements helped equity prices in Poland, Hungary, and Greece. In Turkey, not even the possibility of a market-friendly presidential election result was enough to keep domestic share prices from declining almost 4%, as the lira weakened, and concerns mounted over earnings results. In Saudi Arabia and the United Arab Emirates, equities rallied on improving crude oil prices.

Emerging markets equities enjoyed another period of price strength in the first quarter of 2023 as the reopening of China increased the likelihood of a more stable global economy. The MSCI Emerging Markets Index rose by 5.3% in Australian dollar terms with fairly similar and balanced performances in Asia and Latin America.

In China, an announcement by internet giant Alibaba to split itself into five businesses helped strengthen market performance. Stock prices in Indonesia recorded sharp rises as investors became more optimistic on the trajectory of the economy. Equities in Taiwan and South Korea benefited from expectations of improving hardware and semiconductor orders. Indian share prices were negatively impacted by concerns over valuations in the market and issues related to the highly indebted Adani group companies.

Europe, the Middle East, and Africa witnessed diverse performance. The Czech market rose very sharply on strong earnings results from utility CEZ. Greek shares rallied on good macroeconomic indicators. Hungarian stock prices finished modestly higher while the Polish market closed little changed. Turkey witnessed a very large and tragic earthquake which ultimately helped cause significant share price declines.

Markets in both Saudi Arabia and South Africa finished little changed. Political uncertainty fueled by the continued public disagreement between President Luiz Inácio Lula da Silva and central bank president Roberto Campos Neto helped depress equity prices in Brazil. Weak oil prices sent Colombian share prices sharply lower. The Peruvian and Chilean markets were aided by higher copper prices. Mexican stocks recorded very strong performance on higher economic indicators.

Following a very strong January, emerging markets equities experienced significant profit-taking in February. The MSCI Emerging Markets Index fell by more than 2% over the month in Australian dollar terms, with fairly similar performance in both Asian and Latin American markets and modestly better returns in Europe and the Middle East. The month included generally weaker commodity prices and currencies versus the US dollar.

Share prices in Saudi Arabia fell by more than 3% on further profit-taking following considerable strength last year. Concerns over lower commodities prices pressured South African stock prices. Most Eastern European countries enjoyed positive performance on an improving economic outlook, helped to some extent by relatively warm weather. Turkish equity prices rose solidly despite experiencing a tragic and widespread earthquake.

Latin American markets were dragged down by Brazil and Colombia where share prices were hurt by political uncertainty and marginally weaker crude oil prices. Elsewhere, Chile and Peru saw somewhat less turbulence despite ongoing political strife. Mexican equities held up best, finishing higher, aided by a stable peso that was supported by nearshoring trends.

Sizable share price losses were recorded across Asia. Ongoing geopolitical and regulatory issues caused further weakness in Chinese stock prices and helped pressure currencies and equity prices in South Korea and Thailand. Indian shares acted fairly independently, finishing little changed amid investor wariness over valuations and the recent Adani group events and news. Equities in Indonesia and Taiwan fared better due to signs of economic growth in the former and improved hardware industry stability in the latter.