Liontrust Emerging Markets Fund

• The most significant factor driving the divergent performance between emerging and developed markets – over both the quarter and the year as a whole – was the continued outperformance of the US economy.
• The most significant positive country contributor to Fund performance over the quarter was India. Although the wider Indian market was a mild underperformer in the quarter, stock selection in this market was key.
• The outlook for emerging markets remains at a crossroads, highly contingent on a number of macro outcomes, many of which stem from the early decisions Donald Trump will take as president.

The Liontrust Emerging Markets Fund returned -0.7% over the quarter, compared with the -1.5% return from the MSCI Emerging Markets Index comparator benchmark and the -0.9% average return from the IA Global Emerging Markets sector, also a comparator benchmark*.

The final quarter of 2024 saw emerging markets suffer a notable sell-off, giving back some of the gains that until this point had seen the asset class enjoy a solid year of performance. Emerging markets fell 8.2% in US dollar terms, significantly underperforming developed markets, which were largely flat (-0.4%). Therefore, for the year emerging markets produced a positive return of 5.1% (in US dollars) against developed markets' 17%. The most significant factor driving the divergent performance – over both the quarter and the year as a whole – was the continued outperformance of the US economy, not only creating a growth divergence attracting money to the United States, but also preventing the much-anticipated reduction in global interest rates priced in earlier in the year. Indeed, the US 10-year Treasury yield, having fallen back to near 3.5% late in the third quarter in expectation of the Federal Reserve cutting rates imminently, rose rapidly to close the year above 4.5% due to a robust US jobs market and higher-than-expected inflation. This backdrop also saw a marked rise in the US dollar against global currencies - especially those in emerging markets, which historically creates a difficult backdrop for the asset class.

With a few notable exceptions, most emerging markets were hit hard in the quarter, with Brazil, Korea and Indonesia faring the worst. Both Brazil and Indonesia are particularly sensitive to a rising dollar and bond yield environment, and fiscal concerns continued to trouble investors in Brazil, exacerbating that market’s woes. Korea's extremely weak performance in the quarter (-19.3%) was arguably more notable given its historical tendency to perform well with a strong US economy and robust tech sector, given the country's high dependence on technology exports. This market was weighed down by the specific performance of index heavyweight Samsung Electronics, whose production issues in the latest semiconductor chips have left it playing catch-up to peers such as SK Hynix at a time of very strong demand from clients such as Nvidia. The standout performance of technology – the only sector to produce positive returns in the quarter – did, however, see Taiwan outperform notably, led by continued strong returns from TSMC (Taiwan Semiconductor), the largest company in emerging markets.

Over the quarter, the Liontrust Emerging Markets Fund returned -0.7%, against -1.5% for the MSCI Emerging Markets Index – both of which were boosted in sterling terms given the significant weakness of the pound against the US dollar. The most significant positive country contributor to Fund performance over the quarter was India. Although the wider Indian market was a mild underperformer in the quarter, stock selection in this market was key: capital market infrastructure player KFin Technologies was a notable standout performer, benefiting from both the strength of domestic financial markets as well as expansion into international markets, especially in South-East Asia. A further portfolio benefit came from having a notable underweight allocation to poorly performing Brazil. The key negative detractor on the other side of the ledger was China, where – after a sharp, dramatic surge at the end of the previous quarter thanks to a pro-growth policy pivot – performance proceeded to sag dramatically in the absence of significant policy follow-through and the prospect of impending tariffs under the second Trump presidency.

Portfolio changes during the period included the addition of SK Hynix, which has executed on the development of new, high-powered chips and is likely to see ongoing strength in demand whilst key competitor Samsung Electronics attempts to catch up after a disastrous period. In China, a position was initiated in Haier Electronics, which stands to benefit from the recovery in the Chinese economy, specifically consumer spending. Moreover, the appliances market has been boosted by several trade-in programmes to encourage consumers to upgrade their white goods. Full Truck Alliance was also added in the quarter, following excellent results. The company operates a digital freight and logistics platform and is seeing huge growth in onboarding shippers, taking up to 50% of incremental growth in the industry. In India, exposure to India's financial technology sector was increased and diversified through the addition of wealth manager 360One and online insurance platform PB Fintech. Given the steady ratcheting up of interest rates, the portfolio exited the position in Bank Rakyat Indonesia, a franchise we like very much but is one to return to when there is more visibility on easing in monetary policy. In India, we took profits in property developer DLF Ltd and Axis Bank, which has seen growth begin to significantly lag peers.

The outlook for emerging markets remains at a crossroads, highly contingent on a number of macro outcomes, many of which stem from the early decisions Donald Trump will take as president. Clearly tariffs and their potential scale is front and foremost in the minds of most emerging market countries. We believe a very possible outcome is that, since they have been trailed so heavily, they are largely understood and digested by the market. In the case of China, ownership levels of the market are extremely low and clear valuation comfort is in place. If tariffs are lower than expected, or implemented slower, we believe there can be considerable upside here. If tariffs are at the more severe end, China also still has considerable resources to deploy to further boost the economy, with consumer spending being the likely lever to pull. Elsewhere, the structural growth story of India is relatively well insulated from macro shocks and tariffs regimes, and we expect growth to accelerate after a pause caused by extreme weather and the general election of 2024. The headwinds for emerging markets are at this point well understood and we believe investors should also be asking themselves what can go right for this asset class given low valuations, low expectations and low ownership.

Discrete years' performance (%) to previous quarter-end:

*Source: FE Analytics, as at 31.12.24, primary share class, total return, net of fees and income reinvested

KEY RISKS

Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.

The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

Overseas investments may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of the Fund. This Fund may have a concentrated portfolio, i.e. hold a limited number of investments. If one of these investments falls in value this can have a greater impact on the Fund's value than if it held a larger number of investments. The Fund may encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. Investments in emerging markets may involve a higher element of risk due to less well-regulated markets and political and economic instability. This may result in higher volatility and larger drops in the value of the fund over the short term. Outside of normal conditions, the Fund may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash. Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails.

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