Return to risk-off mode for Emerging Market equities

Emerging equity markets returned to risk-off mode in May ("sell in May..."), with the Emerging Markets index falling around 7% before closing the month with a loss of 3.9% in USD.

A strengthening USD, not least due to surprisingly hawkish Fed talk and the growing risk of a summer rate increase, further lessened optimism on Chinese growth and stimulus, both having a strongly negative impact on metal prices and emerging market currencies. Only oil prices continued to gain against the trend.

MSCI Asia outperformed, down by "only" 1.6%. MSCI China (contrary to a falling local A-market) was supported by the coming end-of-month index review. Taiwan and India recovered as sentiment improved after an earlier weak period, while the Philippines market recovered after a quiet presidential election. Other markets (Korea, Malaysia, Indonesia) corrected strongly, not least on currency weakness.

The other regions saw heavy losses, with (commodity-linked) currency weakness and politics behind the severe drop. Turkey (new PM) and Brazil (new president) led the fall, both down almost 14%, although most other currencies and markets, like South Africa, Mexico, Poland and Russia, shared the downtrend. Greece was the main exception, up 11% on hopes of renewed financial support.        

• In May, we managed to outperform during the downtrend, with stock selection – focused on quality and growth stocks – mainly behind the positive excess return.
• Technology, consumer and even cyclical sectors like energy and materials were positive contributors to our performance.
• Chinese IT stocks (Alibaba, Tencent, AAC Tech) and stocks like NMC Health, SKS Microfinance and Man Wah led the positive contribution list, which was partly countered by the strong correction in Brazilian and Turkish stocks. 
• We have upgraded our stance on Korea and the Technology sector. We are seeing a bottoming-out of the market maily due to the performance of Tech stocks like Taiwan Semi or Samsung. This is a cheap and value market with positive support from the local currency and from exporting companies.
• With the ongoing uncertainty over important short-term issues such as the strength of the global economy, China, Brexit, the Fed, the US elections, the USD and the RMB, on top of still fragile fundamentals, emerging markets can be expected to remain volatile.
• But with investors slowly revisiting these markets after a multi-year-long underperformance, a more (gradual) market rotation into this asset class cannot be excluded, albeit with the necessary volatility.
• We remain prudent in our stock selection, maintaining our focus on quality stocks with a sustainable growth profile in a diversified and balanced portfolio.