QMA Emerging Markets 2020 ReviewQMAEmergingMarkets2020Review

Read the transcript

• –

  Hello, I am Patrick McDonough, portfolio manager for Quantitative Equities at QMA, and I'm here to talk to you about emerging markets for the full year of 2020. 

  As you know, 2020 was a wild ride for emerging markets or equities in general, and we saw some of the worst months historically for the emerging market space as well as some of the best months ever for the emerging market space. And really, I think we can divide the year up into two periods -- the first being the first 10 months of the year and then the November through December period -- and then collectively review what that means for emerging markets going forward. 

  For the first 10 months of the year, obviously it was the impact of COVID and the fear and uncertainty that COVID brought to markets and economies in general. But specifically sort of the crowding effect that happened within emerging markets, both in the large cap but of course all the way down through small-cap names in the space. Within EM, we saw investors really trying to find safe havens for the impact of COVID, and that led to crowding and really compressed weights within markets, largely within two areas. Most of this happening of course within the Pacific Rim area, in part because of the sector weights within those spaces. So we had technology and of course health care as the two significant leaders in the first 10 months of the year. And a lot of that makes sense. 

  There's a little bit of a commonsense approach to that for these areas to have that crowded, compressed space. The first being of course if you're a health care name and you can come up with a treatment of some kind or a vaccine of some kind for COVID, it makes sense that there would be people looking for that hope within the fear that was going on in the pandemic. And then of course, in the same time, there was crowdedness within anything that was seen as a tech name that would be COVID-proof, or at least have less of a direct economic impact from COVID as we all moved our shopping, our working, our communications online across the globe. A lot of this was dominated within the EM space both in large cap and of course all the way down to small cap within Pacific Rim countries because of those large segments of their localized economies. Places like Taiwan, Korea, and of course China were large players in both of those spaces, large concentrations within those sectors within those countries. And of course there was much more direct government control for COVID in these countries. So the first wave, big shock, big scare, big fright for markets as a whole, but then a realization that there was some sort of overreaction in the first quarter and a little bit more green shoots for a recovery going through second quarter and the third quarter. Of course that leads us to our performance within this period -- and for the large part, we did pretty well. 

  Even with all of the volatility, even with all the up-and-down movements within the markets, we hung in there. We were always within spitting distance of the benchmark, or in fact largely outperforming slightly for most of the year. And that's something we're very proud of. We're glad to see that our risk controls and our portfolio diversity did well for this period. Unfortunately, that brings us to the second period of the year, and that really is the November through end-of-the-year period. But I think we should concentrate on the November story for this. If you recall, early November, there was announcements that there were now viable and very effective vaccines for COVID, which of course is a wonderful thing for all of us around the world, and frankly a very good thing for the economy across the world as well. 

  What was interesting though to see that sort of crowdedness that we saw, that fear and uncertainty leading to the crowdedness that we just talked about kind of moving in the opposite direction, that equal and opposite reaction that led to really kind of a junk rally -- in fact, a very broad but very fundamentally lacking rally in the market. And this is actually, believe it or not, even though we underperformed for this period, something that we're very glad to see as long-term investors. What that indicates, as we saw these junky names play out, as we saw very low-quality names -- which think of quality as kind of that canary in the coal mine to see what investors are really thinking about. As people went for that junk rally, as we saw globally after the Great Financial Crisis, as we saw after the Tech Bubble in '99-2000, indicates that people are trying to reevaluate and get out of those crowded names and try to cherry pick a little bit among those names that should shoot out because they were overlooked during the fear and uncertainty of COVID. 

  Now, as I said, we don't like low-quality names in general any more than we like very crowded, expensive names for the first part of the year. But we really don't like paying for bad companies. That's something that, again, as long-term investors, we're not focused on. So we avoided most of those names and we didn't pick up as much of that rally as we really would've liked for November and through December. However, as I said, that is that resetting that we like to see, that beginning of the end of the market craziness that was going on during COVID, and has led to some decent performance so far year-to-date. 

  As we see people take some profits in those less than ideal fundamental names and start distributing their weights through their portfolios into companies that have better growth prospects, that are reasonably priced, but, more importantly, have those quality metrics that indicate they are good, solid companies that will do well as the world and as the economy comes out of the uncertainty of COVID. So we are well-positioned, we feel, for the future. We are well-positioned, we think, for 2021, and we're looking forward to a little bit more of a normalization across markets, but particularly across emerging markets. Because we feel that's where a lot of the economic growth for the next few years will come from in the global equity universe. 

  Thank you very much.