To The Moon

Global markets started on the wrong foot coming into 2022 as a confluence of factors brought about mounting concerns amongst market participants – Inflation sitting at levels not seen in years led to hawkish Central Banks and a military conflict later on between Russia and Ukraine sent commodities prices upwards, placing further pressure on Central Banks policy path, the main culprit of the global equity rout. As a result, we witnessed a volatile market environment where market participants rush to de-risk their portfolios as uncertainties arose.

Having said that, there are still segments within global equity markets which have stood to benefit from the prevailing macroenvironment. In today’s article, we will identify the top 3 best performing equity funds as of 1Q22 and provide our platform’s investors with a understanding as to why these funds have performed well as well as lay out some of our views as the year continues.

Table 1: Top 3 best performing equity funds. Source: Bloomberg

What drove the Franklin Templeton LatAm fund performance?

Despite several tailwinds such as 1) the global growth recovery shifting a gear higher, 2) commodity upcycle, and 3) dollar weakness setting the stage for Latin American (LatAm) equities to perform well in 2021, the bloc’s equity ended yesteryear as one of the worst performing markets. This year, the region’s equity market is the best performer till date – MSCI LatAm Index registered returns of almost 28% as of 31 March, in SGD terms, outperforming global peers by a huge margin.

Chart 1: Brazil and LatAm displayed spectacular performance. Source: Bloomberg

Bolstering the stellar performance is Brazil which has more than 60% weightage in the index, as gleaned from Chart 2 below. With its strong performance year to date, the country’s equities have no doubt uplifted the performance of the index. This leads us to the point - What drove Brazilian equities stellar performance? In our view, supporting the performance of Brazilian equities was 1) the fact that the country is a huge beneficiary of the surge in commodity prices, 2) high interest rates, and 3) cheap valuations after being shunned by market participants.

Chart 2: MSCI LatAm Index Breakdown. Source: Bloomberg

Surge in commodity prices: Before the military conflict between Russia and Ukraine, commodity prices have already risen significantly due to supply demand imbalances. However, with the military conflict that has come to fruition in late February 2022, market participants have priced in a supply shock due to the two country’s role as an exporter commodities – Russia is amongst the largest global oil producers, has a decent market share for metals (copper, steel and nickel) and is the second largest producer of natural gas.

Rate hikes: Brazilian Central Bank has been on a tightening cycle for a yearlong, delivering one of the most aggressive tightening cycles, raising rates by 975bps over the past year to curb with soaring inflation prints. Given the financial sector’s relatively sizeable allocation in the Bovespa Index, companies in the sector has stood to benefit – financial institutions profit margins expands when rates climbs.

Chart 3: Bovespa Index breakdown. Source: Bloomberg

Valuation of Brazilian equities are cheap: Coupled with the abovementioned catalysts, investors have piled into Brazilian equities in droves, driving prices of equities up – trading at a P/E of 7.5x compared to a 10 year average of 14.2x, valuations of Brazilian equities are attractive.

Chart 4: Valuations Brazilian equities presents an opportunity. Source: Bloomberg

Hence, the Franklin Templeton Latin America A Acc USD Fund, which aims to achieve long-term capital appreciation by investing primarily in equity securities of issuers incorporated or have their principal business activities in the Latin American region, was able to return investors chunky profits as the fund closely replicates the MSCI LatAm Index, as evident from the fund’s geographical allocation.

Chart 5: Fund geographical asset allocation. Source: Factsheet

Our thoughts ahead: In our opinion, the region’s equities still has room to run, supported by 1) a continued commodity upcycle and 2) a weaker greenback over in the medium term. These factors are major catalyst due to the fact that the region’s equities has a strong correlation with commodity prices and a weaker dollar will bodes well for emerging markets (LatAm falls under the EM umbrella).

Chart 6: Positive correlation between commodity prices and LatAm equities

Read here on a more in-depth analysis of LatAm's 1Q22 performance.

What drove the $Blackrock World Energy Fund A2 USD(LU0122376428.USD)$?

Oil prices have been on a upward trajectory since last year due to supply demand imbalances – the good progress made by global economies in reopening their economies stoked demand for oil while supply remains tight, so did natural gas. Coming into the new trading year, many expected the supply side of the equation to show signs of improvement but was later surprised by the military conflict between Russia and Ukraine which sent prices of energy even higher – it has become increasingly clear that Russian oil is being ostracised although the US and its allies have stopped short of imposing direct sanctions on Russian oil and gas (US have banned Russian oil imports and the European Union have pledged to reduce dependence on Russia for its energy)

Chart 7: Oil price rallied ferociously since the start of the year. Source: Bloomberg

Chart 8: Energy sector registered chunky gains this year. Source: Bloomberg

Given Russia’s position as an energy supplier, market participants have priced in a supply shock on fears of sanctions coming from Western countries, explaining the sudden surge in oil prices to almost $140 a barrel. Therefore, the $Blackrock World Energy Fund A2 USD(LU0122376428.USD)$, which invests at least 70% of its assets in equity securities of companies whose predominant economic activity is in the exploration, production and distribution of energy globally, was able to capitalise on the increase in energy prices.

Our thoughts ahead: At the current juncture, there are many uncertainties in the energy market. In our view, here are a few possible scenarios that could pan out in the year ahead;

1.   If sanctions on Russia energy supplies fall through – sale of energy supply to Europe is financing the war which have triggered a discussion between leaders to abandon Russian energy exports, prices of energy will trend higher.

2.   Should markets price in a probability that Russia may take retaliatory measures by reducing its energy exports, prices will energy will rise

3.   A lifting of Iranian exports restrictions will immediately increase supply, easing supply tightness which will result in oil prices to cool.

What drove the Blackrock World Mining A2 AUD-H Fund performance?

Similar to the energy market, prices of metals have also been rising rapidly since last year. According to IMF, the surge in metal prices in 2021 comes on the back of 1) a manufacturing based recovery, 2) supply side factors, 3) expectations for faster energy transition and infrastructure spending and 4) storability of metals.

Manufacturing based recovery: Manufacturing did not suffer as much compared to the services sector and yet saw a quicker recovery compared to the latter, especially in China, which utilises a large amount of metals.

Supply side factors: When the pandemic rippled through global economies, mining activities were temporarily disrupted which resulted in a lack of supply yet demand remains moderately high. Even so, freight rates for transportation of bulk materials reach a ten-year high due to congestion in key ports, quarantine restrictions and a rebound in fuel prices all added to the cost of metals.

Expectation for faster energy transition and infrastructure spending: Buoyant expectations about the pace of transition to a greener economy and ambitious infrastructure programs have provided metals prices with a rocket – faster energy transition will drive up consumption of metals and support from infrastructure spending programs increases the demand for metals while supply falls behind, creating a supply demand imbalance.

Storability of metals: Metals are easier to store compared to crude oil or other agriculture goods, which requires specific storage facilities. This makes the pricing of metals more forward looking and particularly sensitive to changes in interest rates ( lower interest rates reduces the cost of carry).

Yet, as supply remains tight coming into 2022, the war in Ukraine brought about more woes due to Russia’s position as an exporter of semi-finished metals goods and transportation routes being blocked. Thus, we saw a sustained rally in metal prices. Such a market terrain augurs well for the Blackrock World Mining A2 AUD-H fund which invests at least 70% of its total assets in the equity securities of mining and metal companies whose predominant economic activity is the production of base metals and industrial minerals such as iron ore and coal globally.

Our thoughts ahead: Now that China has signalled a willingness to deploy extra policy support to ensure stable economic performance ahead of an important party leadership congress later this year, demand from the Chinese will likely be here to stay, providing an encouraging backdrop for commodity prices this year – fiscal policy will loosen to accommodate this year’s growth objective, which includes infrastructure spending that requires large amount of metals such as steel, iron and copper ores. On the supply front, we expect supplies tightness to persist due to structural under investment. 

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