Artemis Funds (Lux) – SmartGARP Global Emerging Markets Equity update

The managers report on the fund over the quarter to 31 December 2023 and the outlook.

Raheel Altaf

Source for all information: Artemis as at 31 December 2023, unless otherwise stated.

Summary

  • 2023 relative return +5.3%. Fund +15.7% vs MSCI EM index +9.8% (in US dollar terms)
  • Q4 relative return -1.9%. Fund +5.8% vs index +7.9% (in US dollar terms)
  • Outperformance over 1,3, 5 years and since inception
  • Value bias in the fund remains substantial, 45% discount to the market…
  • …with a history of delivering good growth. Fundamental value per share of our holdings has outgrown the market by 7% per annum since launch (September 2018)

Performance – favourable tailwinds for our holdings

The promise of emerging markets disappointed in 2023. Despite a rebound in sentiment in the last quarter, EM stocks ended the year well behind developed markets. Against this challenging backdrop, our active approach performed well, ending the year up 15.7% (in US dollar terms) compared to the index at +9.8%. It is also pleasing to report that we have achieved this whilst also providing diversification against more popular growth driven approaches in the sector.

Attribution - lagging during the quarter, stock picking contributes positively over the year

Performance in the quarter was behind the benchmark index. Banks made a strong contribution – PKO in Poland, Banco do Brasil in Brazil and JB Financial in Korea all featured amongst top contributors. Elsewhere, signs of a cyclical recovery in Asia were supportive to Novatek Microelectronics, Wiwynn and Kia Motors. These were offset by weakness in China, where Alibaba, PICC, Miniso Group and Foxconn were all detractors.

Activity – adding to mega cap exposure

Signs of a bottoming in the tech hardware cycle encouraged us to reduce our underweight exposure to the sector somewhat.

Additions – improving fundamental trends

  • Mega caps - TSMC, Samsung, Tencent and NetEase
  • Cyclicals – Star Bulk Carriers, Hankook Tire and Copa

Reductions - deteriorating fundamentals

  • Alibaba, Hello Group, PICC and Ping An
  • Food and Beverages – Grupo Bimbo

The result of these changes is that the fund continues to offer an attractive combination of extremely low valuations and attractive growth prospects. We remain overweight China, Brazil and Korea and underweight India, Taiwan and Saudi Arabia. At the sector level, financials, consumer discretionary and energy feature as the largest overweights. Materials, media and entertainment and consumer staples the largest underweights.

We remain positioned for a rotation into value stocks

We have commented for years about our gradual transition towards value parts of the market because of their attractive characteristics. Despite the outperformance of value stocks over their growth counterparts in the last few years, our valuation discount to the market has not changed materially. The fund continues to offer an attractive combination of extremely low valuations and attractive growth prospects. The forward price/book ratio of the fund is 0.9 and it offers a forward P/E of 6.6 vs 12 for the index (45% discount). We think our discipline around valuations is likely to be a rewarding strategy as we progress through 2024 and for the years ahead.

EM – cheap and unloved, but pessimism well reflected in prices

For much of 2023, Chinese equity markets suffered from weaker sentiment. The Chinese economic recovery has so far been underwhelming. On the positive side, potential for stimulus measures and reasonable levels of interest rates offer support. Chinese stocks have struggled for over a decade and their share prices are well reflective of the risks highlighted. Positive catalysts such as reforms and growth initiatives have the potential to surprise investors.

More broadly, EM stocks are trading on multi-decade valuation lows against developed markets across a range of metrics. EM economies are ahead of the cycle and have started easing. More flexibility around monetary and fiscal policies is causing diverging policy paths with the west and supporting economic growth prospects ahead.

Our focus on fundamentals remains persistent

For several years speculative behaviour, on the back of surging share prices, has reduced investors’ focus on fundamentals. This has created excessively high valuations in parts of the market that have now started to unwind. We think this unwind has further to run. We see less risk in companies that trade on low valuations and so prefer to have more of our capital allocated to this part of the market.

We continue to believe that a focus on companies’ fundamentals, such as earnings and cash flow growth, combined with a strict discipline around valuations, offers the best way to navigate markets in the months ahead.

Past performance is not a guide to the future.
Source: Lipper Limited/Artemis from 31 March 2023 to 31 December 2023 for class I Acc USD
All figures show total returns with dividends and/or income reinvested, net of all charges.
Performance does not take account of any costs incurred when investors buy or sell the fund.
Returns may vary as a result of currency fluctuations if the investor's currency is different to that of the class.
Benchmark: MSCI Emerging Markets Index; the benchmark is a point of reference against which the performance of the fund may be measured. Management of the fund is not restricted by this benchmark. The deviation from the benchmark may be significant and the portfolio of the fund may at times bear little or no resemblance to its benchmark.

Raheel Altaf

Manages:

‘Global emerging markets equity‘, 'Global equity' strategies

Raheel joined Artemis in 2014 and has managed Artemis‘ ‘global emerging markets equity‘ and ‘global equity’ strategies since launch in April 2015 and since April 2022, respectively.

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