Rebound of EM to start the year

Chinese equities posted a nice performance as the government’s stimulus efforts appear to be working, with the central bank continuing to inject liquidity into the financial system. The Indian market set a record high after a surprise repo rate cut of 25 bps, the first since May 2013. Also, Korean equities traded in positive territory thanks mainly to some index heavyweight Technology companies beating 4Q14 street estimates.

In Latin America, Brazil lost ground, posting a weak performance mostly as a result of weak macro conditions and the Petrobras corruption case. Mexico was also under pressure after US durable-goods orders were unexpectedly sluggish.

In Emerging Europe, CCE banks and currencies saw weakness post-the SNB’s decision to remove the CHF peg, the tumble in Greek equities as anti-austerity party Syriza won the general elections and the further drop in the Russian Ruble due to falling oil prices, cuts in the country’s credit rating and fears of further sanctions.

• Despite the tough environment last month, we were pleased to see our strategy outperform.
• This was achieved mainly thanks to our overweight in Indian Banks (especially Axis Bank and HDFC Bank), which rallied after the rate cut, and to some of our high-quality conviction ideas in the Technology and Healthcare sectors (e.g. Tencent, Largan, My EG Services and Hikma Pharmaceuticlas).
• Also, the underweight in materials contributed positively, as the whole sector remains under pressure.
• Besides external factors like the dollar, the oil price, monetary policy in the developed countries and geopolitics, local politics and reform expectations will remain critical drivers of divergence in Emerging Markets performance and earnings expectations.
• We therefore remain prudent in our overall allocations, remaining focused on quality and sustainable growth in our stock selection, while continuing to pay attention to risk through a well-diversified portfolio.