International Equity Strategies – Q4 Review
Fourth quarter outperformance versus the MSCI ACWI ex-US Small Cap Index was driven by positive stock selection within the consumer staples, utilities and information technology sectors. Within consumer staples, Dino Polska (“DNP PW”) was the top contributor. Dino Polska is a leading Polish proximity supermarket chain that has built a strong track record of driving growth and investment returns on the back of competitive pricing, strong cost control, vertical integration (meat sourcing and real estate ownership), and an efficient logistics network. Within utilities, renewable energy producer EDP Renovaveis (“EDPR PL”) was the top performer. EDPR is the fourth largest wind and solar energy producer globally (excluding China) and a pure-play renewable energy producer with 12 gigawatts of installed capacity. It is 83% owned by its parent Energias De Portugal (“EDP PL”), which is the largest utility in Portugal. The company is present in fourteen markets with a strong presence in the US and Iberia. Within information technology, semiconductor company GlobalWafers (“6488 TT”) bolstered performance. GlobalWafers manufacturers silicon wafers, the base material used in the creation of semiconductors. The company’s products are shipped to all major semiconductor fabricators and foundries globally. GlobalWafers produces wafers in all dimensions but derives 40% of revenues from the 8-inch variety, which is the key node for power management integrated circuits, and industrial applications.
Partially offsetting these positive effects was stock selection in the industrials sector, the overweight to healthcare and underweight to materials. Within industrials, A-Living Services (“3319 HK”) was the largest performance detractor during the quarter. A-Living Services is a leading Chinese property management services provider that manages over 125 million square meters (focused on mid- to high-end properties) spread across more than 65 cities throughout China. Unlike the property development industry, A-Living enjoys structural growth potential as it derives its revenues from fees on existing properties under management. Share price weakness during the quarter was attributable to profit taking by investors following strong gains earlier in 2020.
The strength of the market since the depths of the initial pandemic outbreak has confounded many. We argued early in the second quarter that because the nature of this down cycle was unique in that it was a government-imposed economic lockdown, the ultimate re-opening would lead to a sequential acceleration of economic growth off the bottom that would be quite strong. Businesses and institutions have been resuming, albeit unevenly, and central bank support continues to be accommodative to liquidity. The market has responded favorably to these factors.
So where to from here? The backdrop remains highly uncertain amid the re-acceleration in outbreaks and the emergence of new virus variants. While these are material risks, we believe the overwhelming influence upon market performance will be the continued pace of economic recovery surprising to the upside.
The demand for consumer goods has proven to be expanding, and the supply side has not been able to close the gap. This should lead to continued strength in industrial activity, even in the absence of an expansion of COVID treatments or vaccines.
For the consumption side of the economy, which is still lagging dramatically behind previous levels, an acceleration of vaccine production and distribution and increased testing solutions are likely to support a gradual normalization of activities.
The market’s concern about these assumptions creates a healthy backdrop for our investments. In fact, the uncertainty of the recovery is likely to act as a buffer to the market overall as investors continue to climb a wall of worry. This combined with a very accommodative monetary policy backdrop, where Fed Chairman Powell has vowed to allow inflation to move above historic target levels before taking any tightening measures, results in a constructive backdrop for risk assets like growth equities.
That being said, as is the case in most market recoveries, if we do experience the continued economic recovery that we expect in 2021, there will likely be periods where that broadening of growth will lead to a temporary transition or mean reversion favoring lower quality, lower growth equities. These will likely represent attractive buying opportunities for us.
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This report is for the purpose of providing some insight into Pembroke and the Pembroke funds. Past performance is not indicative of future returns. Any securities listed herein, are for informational purposes only and are not intended and should not be construed as investment advice nor is it a recommendation to buy or sell any particular security. Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Pembroke seeks to ensure that the content of this document is correct and up to date but does not guarantee that the content is accurate and complete and does not assume any responsibility for this. Pembroke is not responsible for decisions or actions taken or made on the basis of information contained in this document.