Q4 Allocation Report - Milltrust GEMMA UCITS

0

4TH QUARTER 2014

MARKET REVIEW & ALLOCATIONS REPORT

MILLTRUST GEMMA UCITS MODEL PORTFOLIO

GLOBAL EMERGING MARKETS EQUITY

Funds: Milltrust Greater

China Fund Milltrust India

Fund Milltrust ASEAN

Fund Milltrust LatAm

Fund Milltrust Brazil

Fund

Existing Allocations

(as of Sept 30th): 21.0% 27.5% 19.5% 22.8% 9.1%

New Allocations:

23.5% 25.0% 19.5% 22.8% 9.1%

Action: Increase by 2.5% Decrease by 2.5% No Change No Change No Change

Summary: The China exposure remains at the low end of our optimal allocation range (24%-25%), whereas India shifts to the top of the range (15%-25%). Our exposure to ASEAN and Latin America as a whole remain on target.

Summary: China India ASEAN LatAm ex Brazil Brazil

Optimal Allocation:

29.2% 20.0% 19.1% 17.6% 14.1%

Range: 24%-35% 15%-25% 14%-24% 13%-23% 10%-20%

OPTIMAL COUNTRY ALLOCATIONS

4TH QUARTER 2014

ALLOCATIONS SUMMARY

FUND ALLOCATIONS

We use our model recommendations to shape our allocations to our underlying Funds.

The graph below shows the final output of our proprietary Strategic Regional Allocation Model (long-term) and Tactical Regional

Allocation Model (short- to medium- term). Both models are updated monthly.

29.2%

20.0% 19.1%17.6%

14.1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

China India ASEAN LatAm ex-Brazil Brazil

Allocati

on %

Optimal Country Allocation Breakdown


Country Country/Region

Valu

ati

on

Mom

entu

m

Gro

wth

Dem

and

Consu

mer

Confi

dence

Exte

rnal

Bala

nce

Fore

ign

Exposu

re

Senti

ment

Fore

ign

Exchange

Moneta

ry

Policy

Politi

cal

Revie

w

Str

uctu

ral

Refo

rm

China Greater China

India India

Indonesia ASEAN

Malaysia ASEAN

Philippines ASEAN

Thailand ASEAN

Brazil Brazil

Chile LatAm ex Brazil

Colombia LatAm ex Brazil

Mexico LatAm ex Brazil

Peru LatAm ex Brazil

Regions Growth &

Opportunity Set Secular Trends Political Risk Economic Risk Financial Risk

China 1.55 0.68 -0.62 0.85 0.91

India 0.30 -0.39 -0.60 -0.81 -0.38

ASEAN 0.09 0.02 -0.13 0.15 -0.24

Brazil -0.81 0.10 -0.17 -0.60 0.20

LatAm ex Brazil -0.35 -0.12 0.48 -0.01 0.06

4TH QUARTER 2014

COUNTRY SCORECARDS

Trending downwards, Negative

Neutral Trending upwards,

Positive

TACTICAL REGIONAL ALLOCATION MODEL (TRAM)

STRATEGIC REGIONAL ALLOCATION MODEL (SRAM)


Country Short Term Outlook Assessment

China =

Recent data has shown that the pace of China’s recovery has slowed slightly but the economy is

still trending upwards with the possibility of more ‘mini stimuli’ to come as required; we do not

discount the prospect of interest rates or RRR cuts in the future. Valuations in China are still very

low with some clear upside as the recent government reforms start to take effect; these include

the ongoing anti-corruption drive, the SOE reform which will include partial privatization in a bid

to attract private investment and increase shareholder value and the Stock-Connect which will

start the integration of the exchanges within the Chinese territory. On the downside, we are still

concerned about the property market and are actively looking for signs that the market is

stabilizing.

India

India is no longer ‘fragile’. Its current account deficit has reduced to a manageable level, economic

and earnings growth are accelerating, there is a new wave of infrastructure projects on the agenda

and the ‘Modi effect’ is driving both foreign and domestic sentiment. Despite the run-up in

equities this year, the valuations are still at 10-year averages with P/E ratios still at half of what

they were at the peak of the market in 2007/2008. Whilst we are positive on India, we are closely

monitoring the government’s next actions as they will have to start delivering on their promised

reforms, particularly in the taxation and labour markets, in order for the stock market rally to be

sustainable. India’s food inflation is another highly sensitive and relevant issue in India given that

about 25-30% of India’s population spends more than half of its monthly household income on food.

Indonesia

Despite GDP growth recently slowing to its weakest pace in 19 quarters and its current account

deficit making it vulnerability to global monetary conditions, Indonesia is providing a lot of

medium term optimism. There is increasing noise about spending more money on infrastructure

and manufacturing which will help reduce Indonesia’s over-reliance on commodity exports,

reducing the fuel subsidies which should help ease the current account deficit, and implementing

some significant SOE, education and tax reforms. Consumer stocks should benefit as Indonesians’

spending power improve. There are a lot of positives here, some of which have already been

priced in the markets. We will also be carefully monitoring the funding and implementation of

these reforms.

Malaysia

Malaysia is the second fastest growing economy (tied with the Philippines) in Asia after China

with 2nd quarter growth of 6.4%. Much of this growth has been consumption-led which in turn

has been primarily funded by debt (household debt is very high at 86% of GDP). This is

unsustainable given the existing income levels so we expect some contraction. Especially as

Malaysia is also entering a tightening phase. In the meantime, doing business in Malaysia is

getting better as companies continue to benefit from the government’s mission to reduce

bureaucracy. The big agenda item is the government’s Goods and Services Tax to be applied from

next April. The aim is to significantly reduce the size of the shadow economy and provide new

sources of revenue for the government. There are risks to higher inflation here.

Philippines =

The Philippines continues to be one of the bright prospects in the region with strong growth (2nd

highest in Asia) providing the central bank with more leeway to adjust monetary policy and to

support growth by increasing spending. Whilst China and the other Asian economies (except

Malaysia) are loosening to stimulate growth, the Philippines are going in the opposite direction

with expectations of further rate increases. We expect the economy to continue to expand over

the coming quarters due to an increasingly competitive manufacturing base, higher exports

COUNTRY REVIEW & OUTLOOK

4TH QUARTER 2014

COUNTRY ASSESSMENTS


(electronics, agriculture), and strong local demand. Despite the strong macro picture, the

valuations are very expensive (nearly 2 standard deviations from long term average), so we will

proceed with caution.

Thailand

Thailand, which avoided a recession earlier this year, has provided some short-term optimism

with the improved political stability boosting consumer confidence (at a 13-month high) and

business sentiment. The new government will be adopting an expansionary fiscal policy to help

the economic recovery with structural reforms also expected. Whilst consumption and

investment have started to recover, exports remain weak and the political uncertainty will be set

to return once the junta steps aside in late 2015. Valuations are still high due to depressed

earnings, but earnings growth is anticipated.

Brazil =

Brazil provides a mixed bag of both negative trends (shrinking economy, high inflation, very tight

monetary conditions) and positive trends (record low unemployment, promise of market and

business friendly structural reforms). What is clear is that reform is desperately needed to

stimulate the economy. The upcoming election in October will provide a key catalyst for the future

of the economy. An opposition win would most likely lead to a sharp rise in the Brazilian stock

market and encourage businesses to invest and expand more. Should Dilma, the incumbent, win,

the markets will likely fall further as her market ‘unfriendly’ interventionist policies would be set

to continue. In reality, regardless of who wins, there will be challenging times ahead.

Chile

Chile’s economic growth has been on a downward trend led by a slowdown in consumption,

uncertainty around the impact of the recent fiscal reforms on future investment and growth and a

decrease in copper prices. We believe the reforms are a case of ‘short term pain, long term gain’;

the government’s new tax reform, for instance, is likely to improve Chile’s medium to long-term

outlook as the reform revenue gets re-invested into the economy. 2015 is likely to be a better year

as the economic deceleration bottoms out in 2H 2014.

Colombia

Despite the slowdown of the commodity boom which negatively impacted commodity-exporting

countries like Colombia this year, Colombia has outperformed its regional peers and has become

the fastest-growing of the major Latin American economies with consensus for next year’s growth

in the 5% range. A key driver for the coming years will be the country’s large infrastructure program

centered on building new roads. The prospect of a peace deal with the rebels, whose attacks on

oil infrastructure earlier this year significantly affected output, would also be a very welcome

development. Moody’s upgraded Colombia this year to Baa2 (same as Brazil).

Mexico

We have a positive outlook for Mexico as several indicators have shown a recovery in the economy.

Increasing demand from the US, an accelerating manufacturing sector, the opening of the energy

sector to private investments, forcing competition in the telecoms market as well as labour,

education and financial reforms will all provide the Mexican economy with a tailwind going into

next year. The forecasted growth for next year is 3.7%, following last year’s 1.1% and this year’s

target of 2.7%.

Peru

Peru, like Colombia, is a medium-sized commodity exporter with an open-market economy in Latin

America. Unfortunately for Peru, its main exports, gold and copper, suffered significantly from

weaker prices and softer demand particularly from Asia. Peru is now amidst the worst economic

deceleration in five years with possibility of entering in a recession. The Central Bank is likely to

continue a loosening monetary policy in the hopes of triggering the recovery process. Growth is

still likely to be around 4% which isn’t two bad these days, just not the 6-plus% that Peru has

enjoyed over the past decade.


Indonesia

Malaysia

Philippines

China

India

Chile

Colombia

Mexico

Peru

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

0% 1% 2% 3% 4% 5% 6% 7% 8%

3 m

onth

change

Annual GDP Growth

GROWTH

Growth rates look the most attractive in Asia. Latin America, a continent of more commodity focused economies, has

felt more of the impact from the slowdown in the commodity boom.

Not listed below are Thailand (+0.4% GDP Growth, +180% change) and Brazil (-0.9% GDP Growth, -147% Change).

Chile and Peru) are commodity-focused economies

which suffered from the commodity slowdown.

Colombia, also a commodity-exporter, was less

impacted as oil and coal, their main exports, were

less affected.

The Central Bank of India forecasts a 5.5% GDP

growth for next year and the expectation is to not

need to lower interest rates to reach this target.

This is positive given India’s current ‘war on

inflation’.

VALUATION & MOMENTUM

Country Region Valuations Momentum

Price Earnings

Brazil Brazil Cheap Oversold Negative

Chile LatAm ex Brazil Cheap Neutral Neutral

Colombia LatAm ex Brazil Cheap Oversold Neutral

Mexico LatAm ex Brazil Neutral Neutral Neutral

Peru LatAm ex Brazil Neutral Oversold Negative

China China Cheap Neutral Neutral

India India Neutral Neutral Neutral

Indonesia ASEAN Expensive Neutral Neutral

Malaysia ASEAN Neutral Neutral Neutral

Philippines ASEAN Expensive Neutral Neutral

Thailand ASEAN Expensive Neutral Neutral


-20

0

20

40

60

80

100

120

140

India Indonesia Brazil China Malaysia Mexico Thailand Peru Chile Colombia Philippines

DEMAND

Manufacturing activity and industrial output can be a useful proxy for consumer demand, given how sensitive the

manufacturing sector is to consumption. We look at both Industrial Production and PMI numbers.

CONSUMER CONFIDENCE

This questionnaire focuses on the consumer’s current financial situation and on expectations about inflation, unemployment, wages and major purchases for the next 6 months. The value 100 indicates no evolution in consumer’s sentiment, a value over 100 indicates increasing confidence and a value under 100 indicates low expectations.

With very low unemployment, the Brazilian household is still

maintaining a relatively good standard of living.

Malaysia is at a turning point as household debt

reaches uncomfortable levels. We feel there is some

downside risk here.

The Mexican government’s first year in office was

unpopular, but we expect consumer confidence to

rise.

Indonesia

China

India

Brazil

Mexico

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

49 49.5 50 50.5 51 51.5 52 52.5 53

3 m

onth

change

PMI

Purchasing Managers' Index

Industrial Production

Latest Prior

Chile -4.1% 0.9%

Brazil -3.6% -7.1%

Thailand -2.7% -5.3%

Malaysia 0.5% 7.0%

India 0.5% 3.4%

Indonesia 1.4% 6.7%

Colombia 1.6% -0.6%

Peru 1.8% 2.0%

Mexico 2.1% 2.0%

China 6.9% 9.0%

Philippines 7.7% 10.8%

Despite the drop in Industrial

Production, China is still expanding,

albeit at a slower pace. The government

is on standby with more stimulus if

required.

The ‘Modi effect’ in India and the

‘Jokowi effect’ in Indonesia have

created a strong uplift in expectations

for higher standard of living.

Expansion Contraction

Incre

asi

ng c

onfi

dence

Low

expecta

tions


We look at the ‘FX reserves to short term external debt and current account balance’ ratio (the latter is known as a countrys’

gross external financing requirements) to anticipate each country’s ability to meet their foreign payments and debt obligations

and to ultimately assess their credit health.

Indonesia

Malaysia

Philippines

Thailand

China

India

Brazil

Chile

Colombia

Mexico

Peru

-10%

-5%

0%

5%

10%

15%

0% 200% 400% 600% 800% 1000% 1200% 1400%

3 m

onth

change

Fx Reserves / (Short Term External Debt - Current Account Balance)

(80,000)

(60,000)

(40,000)

(20,000)

-

20,000

40,000

60,000

80,000

Brazil Indonesia Mexico India Colombia Peru Chile

FDI vs Current Account

Current Account FDI

Given we are likely to enter a phase of tightening monetary conditions with the US looking more likely to tighten earlier

than expected, we are paying particular attention to countries with current account deficits which are likely to be more

vulnerable in these conditions.

However, we also look at the level of foreign direct investment versus current account deficits. A current-account deficit

is likely to be more manageable if it is financed by foreign-direct investment.

EXTERNAL BALANCE

Current Account (% of GDP)

Last 12 Months

Peru -4.96%

Colombia -3.59%

Brazil -3.49%

Indonesia -3.02%

Chile -2.34%

Mexico -1.95%

India -0.98%

Philippines 0.94%

China 1.77%

Malaysia 2.60%

Thailand 3.22%

India’s foreign-exchange reserves are near record highs

which should provide them with some protection should

there be a repeat of the EM turmoil. Meanwhile, India’s

credit rating outlook was raised to stable from negative

by Standard & Poor’s.

With the Indian economy recovering nicely this year,

we could expect to see a slight increase in the current

account deficit as India starts buying more machinery

and capital equipment to support the infrastructure

projects.

Brazil may be ‘fragile’ but it has a healthy FX reserve

balance to deal with sharp capital outflows.

Reduction of fuel subsidies which should help ease the

current account deficit in Indonesia.

FOREIGN EXPOSURE

http://topics.bloomberg.com/india/

http://topics.bloomberg.com/standard-%26-poor%27s/


Indonesia

Malaysia

Philippines

Thailand

China

India

Brazil

Chile

Colombia

Mexico

Peru

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

-5% 0% 5% 10% 15% 20%

3 m

onth

change -

Curr

ency

3 month change - Equity Market Index

-10.00%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

Chile Indonesia Colombia India Peru Brazil Thailand Malaysia Mexico Philippines China

% C

hange in R

EER f

rom

3 y

ear

avg.

Whilst we do not hedge currencies, we do look at currency valuations to determine whether a currency is under- or over-

valued. We compare the weighted average of a country's currency relative to an index of 61 currencies adjusted for the

effects of inflation (Base year 2010), also known as the real effective exchange rate (REER). In the graph below we compare

the current REER to its 3-year average.

Overvalued

Undervalued

FOREIGN EXCHANGE

SENTIMENT

The blue circle below highlights countries with positive sentiment which is typically where we see an upward trend in markets

and currencies.

Positive Sentiment

The Indian Central Bank has repeatedly intervened, keeping

the rupee around the Rs60 per dollar mark. Expectations are

for the rupee to appreciate once the central bank stops buying

dollars.

Sentiment can change very rapidly in Brazil depending on the

election results. The incumbent would be market un-friendly.


-12.00%

-10.00%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

Brazil Indonesia India Peru Thailand Mexico Chile China Colombia Philippines Malaysia

(GD

P G

row

th -

Policy R

ate

)

MONETARY POLICY

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

Late

st M

onth

ly %

Country

Inflation Target Inflation (maximum)

Tighter Environment Looser Environment

We regularly monitor actual versus target inflation rates to help anticipate future monetary conditions and Central Bank

actions. Inflationary pressure leaves little room for looser monetary policy at home to offset rising global interest rates.

Both India and Brazil are at the top of their inflation target

zones with India looking to reduce inflation by another 2% by

the end of next year. Brazil find themselves in an unwelcome

phase of stagflation, increasing inflation and low growth.

On Sept 3rd, Brazil’s central bank kept the benchmark interest

rate unchanged at 11 percent for the third straight meeting.

The central bank expects inflation to start converging to 4.5%

in 2016 if monetary conditions are maintained. Brazil is

simultaneously plagued with low growth; expectations are for

1% growth next year. There is a consensus belief that

structural reform must be implemented to lift the country

out of the recession.

http://topics.bloomberg.com/interest-rate/

http://topics.bloomberg.com/interest-rate/


Country Election & Date Likely Win Who Won Mkt Friendly

Indonesia Parliamentary (Apr-14) Opposition

Colombia Presidential (May-14) Incumbent

India Presidential (Jul-14) Opposition

Indonesia Presidential (Aug-14) Opposition

Brazil Presidential (Oct-14) Too close to call

POLITICAL REVIEW

2014 was an important election year for the developing world. Nearly everyone voted this year and some countries even

voted twice.

We have highlighted below some of the key election results and assessed their market impact.

All the eyes of the world are on the Brazil election s in October. Neves is market friendly, Dilma (the incumbent) is not.

China

SOE Reform

Shanghai-Hong Kong Link

Malaysia

Tax Reform

Indonesia

SOE Reform

Education Reform

Tax Reform

Brazil

Financial

Reform

Infrastructure

Reform

Mexico

Labour Reforms

Education Reforms

Telecom/Media Reforms

Energy Reforms

Fiscal Reforms

Political Reforms

India

Railway Reform

Infrastructure Reform

Financial Reforms

Chile

Tax Reform

Colombia

Infrastructure Program

(New roads)

Structural reform is essential to boost productivity and therefore sustain growth. This year we are seeing a strong push by

some countries to carry out the necessary reforms, particularly, China, Indonesia, India, Brazil, Mexico and Chile.

STRUCTURAL REFORM


DISCLAIMER:

Milltrust International LLP is a subsidiary of Milltrust International Group (Singapore) Pte Ltd. and is authorised and regulated

by the Financial Conduct Authority in the United Kingdom. Milltrust International (Singapore) Pte. Ltd. is a wholly-owned

subsidiary of Milltrust International LLP. Milltrust International (Singapore) Pte Ltd has submitted a notification for Exempt

Fund Manager status to the Monetary Authority of Singapore, and in accordance with the changes to the regulatory regime for

fund management companies in force from August 2012 will supplement this notification during the prescribed transition period

to comply with the new rules. This document does not constitute any offer or invitation to purchase or subscribe for any shares

or other securities. This document is confidential. It is being supplied to you solely for your information and may not be

reproduced, forwarded to any other person or published in whole or in part for any purpose without the prior written consent

of Milltrust International LLP. No reliance may be placed for any purpose whatsoever on the information contained in this

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to the accuracy, fairness, sufficiency or completeness of the information, opinions or beliefs contained in this document. Save

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information, opinions or beliefs. Any financial projections given are illustrative only and none of the projections or assumptions

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