Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown here.
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The views expressed in this investment report represent the opinions of PNC Capital Advisors, LLC and are not intended to predict or depict performance of any investment. All information contained herein is for informational purposes and should not be construed as investment advice. It does not constitute an offer, solicitation or recommendation to purchase any security. The information herein was obtained by various sources; we do not guarantee its accuracy or completeness. Fund performance quoted above is for class I shares. Past performance does not guarantee future results. These views are as of the date of this publication and are subject to change based on subsequent developments.
PNC Emerging Markets Equity (class I) Fund returned 13.67% in the first quarter versus a return of 9.93% for the benchmark MSCI Emerging Markets Index.
In terms of country attribution, stock selection and country allocation contributed to relative investment results. Positive country-allocation effects came from overweights to Argentina and Italy, along with an underweight to India. Negative country allocation effects came from an underweight to China, along with overweights to Hungary and Indonesia. Positive selection effects came from stock selection in China, Russia, and Poland. Negative selection effects came from stock selection in Korea, Thailand, and the United Arab Emirates.
In terms of sector attribution, stock selection contributed to relative investment results, while sector allocation detracted. Positive sector allocation effects came from an overweight to Consumer Discretionary, along with underweights to Materials and Consumer Staples. Negative sector allocation effects came from an overweight to Health Care, along with underweights to Information Technology and Energy. Positive selection effects came from stock selection in Financials, Energy, and Communication Services. Negative selection effects came from Information Technology, Real Estate, and Health Care.
Global equity markets staged a dramatic rebound during the first quarter, essentially putting the fourth quarter 2018 selloff in the rearview mirror. Progress towards a U.S./China trade deal and a pivot by the Federal Reserve and European Central Bank away from tightening measures seemed to ease investors’ minds. Emerging equity markets rallied to near six-month highs as a result of trade optimism, a stable U.S. dollar, higher oil prices, and a dovish Fed, although results still trailed developed markets during the quarter.
While markets generally started the year with optimism, buoyant moods were tempered by renewed global growth fears. The International Monetary Fund cut its growth forecast three times in the last six months due to worsening economic data. Likewise, a move away from monetary policy tightening by major central banks reflects the less sanguine near-term economic growth outlook. In the matter of several quarters, the rise of synchronized global growth has been replaced by fears of synchronized global contraction, as globalization can be a double-edged sword. In our view, investors appear increasingly focused on the potential unraveling of global supply chains.
In Asia, attention continues to be centered on a slowing Chinese economy and the still unresolved U.S./China trade dispute. Prospects for a major agreement this year are possible, but remain uncertain. Chinese equities rallied during the quarter, as the government announced several steps meant to spur economic growth. Measures include tax cuts and the loosening of bank reserve requirements, with the goal of boosting lending, consumption, and investment.
Export-driven Asian economies, including those of Japan, Korea, and Taiwan, have been negatively affected by U.S./China trade tensions. Even under a positive deal scenario, China will likely buy more goods from the U.S. at the expense of both Korea and Taiwan. Japanese economic statistics continue to weaken.
In India, the campaign for the election of the next prime minister is in full swing. Seeking his second term, current Prime Minister Narendra Modi is facing opposition that seems to be gaining momentum. At the end of the quarter, Thailand held its first general election since the 2014 military coup. In Indonesia, President Joko Widodo was re-elected allowing for the continuation of his policies.
The focus in Latin America continues to be on the new Brazilian administration and whether it can push through much-needed reforms. In Mexico, populist rhetoric by the new administration is rattling both the domestic and international investor base.
International investors have been witnessing slowing global growth over the past several quarters. The question now becomes whether the global economy slips into recession or whether we experience a rebound off of another mid-cycle slowdown, similar to 2016. On one hand, negative interest rates, a broad-based industrial downturn, jittery emerging markets (e.g., Turkey), and inverted yield curves point to potential trouble ahead. That said, we believe that a stabilizing China, low inflation, a resilient consumer, and more accommodative monetary policies will allow for the mid-cycle scenario to play out.
Global investors remain concerned about high relative levels of developed and developing market indebtedness, geopolitical considerations and populism, central bank policy, and the sustainability of global growth. We continue to search for companies within attractive regions that have robust earnings growth, high-quality balance sheets, strong management teams, and clearly defined growth strategies.