Emerging Markets Strategy September Commentary


General equities performed strongly during the quarter, supported by ongoing policy stimulus and an improved economic outlook. Our Global Listed Infrastructure funds underperformed general equities during this period but outperformed most key benchmarks.
Economic data continued to show signs of a strong rebound from the COVID-19-induced lows of the second quarter, albeit the rebound moderated. COVID-19 infections continued to spread in many regions, resulting in targeted changes to mobility restrictions, particularly in the U.S. and emerging markets and more recently Europe. As such, market expectations for a V-shaped economic recovery tempered during the quarter. Government stimulus was further extended in many regions, including the landmark €750bn European Recovery Fund. Stimulus, easy monetary policy, expectations of bond rates remaining low for a significant period and positive news flow around vaccine development all combined to support financial markets. Concerns around rising inflation risk continued given the accommodative monetary policy but is offset by the significant economic slack globally.
Political relations, particularly related to China, continued to deteriorate, whilst Biden remained the favourite to win the U.S. presidential election. The global commitment to decarbonisation gained further momentum with Biden’s climate change policies, which includes a proposed $2 trillion green stimulus plan over 4 years, Europe’s enhanced carbon reduction target of 55% by 2030 and China’s pledge of net-zero by 2060. Latin American and Indian economic outlooks continue to be challenged as COVID-19 infections surged, with hope of more stimulus to come.

Portfolio Performance

On a regional basis, Latin America was the top contributor to quarterly performance (+0.62%), of which Mexican communications company Telesites (+1.08%), Mexican electric utility CFE Capital (+0.34%) and Mexican rail company GMexico Transportes (+0.23%) were the lead performers.

Telesites is a Mexican communications company with communication towers distributed across Mexico. Telesites has been transferring a portion of its tower portfolio into a FIBRA structure, which comes with lucrative tax benefits. Shares rose on a successful first-phase transition.

CFE Capital is a Mexican transmission company. CFE currently owns and operates 100% of the transmission assets in Mexico under a 30-year concession (with approx. 28 years remaining) with a 20-year extension option. Volumes have remained somewhat steady despite the pandemic. The company has continued to pay dividends well above the minimum quarterly distribution despite virus affected volumes.

GMexico Transportes (GMXT) owns and operates 10,400 km of rail network in Mexico and the U.S. GMXT’s consolidated rail portfolio is the largest in Mexico. Volumes have recovered faster than expected, helping the stock, which is also reflecting a slight takeover premium due to M&A rumours surrounding its closest competitor, Kansas City Southern.

Turning to Asia Pacific, Chinese electric utility China Everbright International (+0.32%) also contributed to quarterly performance.

China Everbright International is a leading player in China’s largest waste-to-energy operator. The quarter saw increased clarity of sector subsidy policies, helping the stock advance. The company’s change of name into China Everbright Environment also sharpen the focus and differentiate the company from other sister companies under China Everbright Group.

Indonesian toll road operator Jasa Marga (-0.77%) was the largest detractor from quarterly performance.

Jasa Marga is Indonesia’s largest toll road operator. The majority of its roads are located in Greater Jakarta, a very highly populated area that provides the basis for high traffic volume on Jasa Marga’s toll roads. COVID-19 related mobility restrictions in Jakarta continued to impact Jasa Marga’s performance.

All returns are in local currency.

Positioning and Outlook

This Strategy is invested in high-quality companies benefiting from structural drivers, with strong cash flow and dividend yields. We have strong conviction in the long-term opportunities within emerging markets listed infrastructure. At the regional level, the Strategy is split between Asia Pacific EM (67%) and Latin America (29%), with the remainder in cash. At the sector level, the Strategy is split between economically sensitive user-pays assets (39%) and regulated utilities (57%).

For the RARE Emerging Markets Strategy, the primary quantitative tool in portfolio construction is Excess Return, on which our stock ranking system is based.

Quarterly Stock Highlight

This quarter we review Filipino port operator International Container Terminal Services (ICTS).

ICTS is a Philippines-based port operator that operates terminals through long-term concession agreements with local port authorities and governments.

ICTS has terminals primarily in emerging markets with a primary focus on origin & destination (O&D) cargo. O&D cargoes have higher pricing power when compared to transhipment cargoes, so ICTS mainly focuses on maximising the cargo yield as opposed to volumes.

About 53% of total volumes are from Asia, 30% from the Americas and 17% from Europe, the Middle East and Africa. The aggregate port utilisation is also only about 68% and we see ample room for utilisation to increase across its ports.


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