“The base case is that the US-China trade dispute will be resolved because it is in everyone’s interest to reach an agreement. However, there is a danger that investors are too complacent, reflected in the fact that most markets, including Chinese share prices, are still higher for the year,” said Fabiana Fedeli, global head of fundamental equities and senior portfolio manager emerging markets at Robeco.
Until there is a resolution, markets are likely to be news-driven, without a clear long-term direction, she told FSA during a recent visit to Hong Kong.
Yet, “China’s negotiating position is stronger than a year ago, and the US might well have over-played its hand,” she said.
Fedeli pointed to the “green shoots of economic recovery in China generated by fiscal and monetary stimulus measures by the Chinese authorities”, evinced by higher corporate earnings and improved PMI (purchasing managers’ index) numbers.
“Domestic public opinion also backs a tougher stance against the US. Meanwhile, the open letter signed by many US companies, (including Nike and Adidas) that are reliant on China suppliers, complaining that US tariffs are a ‘tax on the consumer’, raises the pressure on President Trump to reach a deal,” she said.
However, until a deal is finally inked, Fedeli recommends China sector allocations to domestic consumption-related companies, industrials, non-bank financials (especially insurers ) and materials.
Exporters’ earnings will continue to suffer most, including those of small- and medium-size enterprises, which are key parts of the global supply chain for the technology sector.
Other fund managers have also raised concerns about China’s local government debt problem, which might be further fuelled by the recent stimulus measures.
Fedeli co-manages the €973m ($1.08bn) Robeco Emerging Markets Equities Fund and the €1.09bn Robeco Emerging Stars Equities Fund. Both products closely track the MSCI Emerging Market index in terms of returns and volatility, and (perhaps as a consequence) have outperformed the sector average during the past three years, according to FE Analytics data.
3-year cumulative return %
|Annualised volatility %||
|Robeco Emerging Markets Equities||
|Robeco Emerging Stars Equities||
|MSCI Emerging Markets Index||
|Emerging Markets Sector Average||
Source: FE Analytics. Data in US dollars: 20 May 2016 – 22 May 2019
The funds’ largest country exposure is China, although the emerging stars fund is underweight compared to the benchmark. Both have overweight positions in Korea, with large holdings in Samsung Electronics, and also in Russia and Brazil, two of the original so-called Bric countries.
“Russia has introduced orthodox monetary and fiscal polices in recent years and we are encouraged by structural improvements in the country’s major oil and gas companies [such as Lukoil],” she said.
“Brazil is on a reformist path since the presidential elections last year, and a Modi victory in India should be good for Indian equities too,” she added.
Fedeli’s least favourite country exposure is Turkey, “where the economy is too firmly controlled by the government and is set on an inflationary spiral”.
About a third of both funds’ alpha is attributed to country allocation; the rest is earned through stock selection, according to Fedeli.
She emphasised the critical importance of ESG to the stock-picking process, and the role that Robeco plays as an “active, not activist, investor”.
“Exclusion isn’t the answer. Instead, we prefer encouraging companies we invest in to improve their ESG practices,” Fedeli said.
“Unequivocally, adopting ESG principles adds material value to a company’s operations, earnings and sustainability,” she said.
Robeco Emerging Markets Fund and Robeco Emerging Stars Equities Fund vs MSCI Emerging Markets Index and equity emerging markets sector average