New Capital Emerging Markets Future Leaders Fund

Marketing Communication

Executive Summary

Key events in market

Emerging Markets (excluding China) rose 5.14% in October – which was OK in absolute terms, but underperformed global equities by ~1% and US and European markets by ~2%. This was mainly a function of increased risk appetite on hopes of a policy pivot by the Federal Reserve. Broad Emerging Markets (including China) fell 3.2% in October on Chinese newsflow and data. Turkey (+23%), Poland (+15.9%) and Hungary (14.5%) were the best performing markets, whilst Taiwan (-5%), Singapore (-2.8%) and Qatar (-2.4%) the laggards.

Key performance & positioning updates

With defensive positioning in the month, the Fund’s main positive contributors were Brazil, Mexico and South Korea. Whilst the best performing sectors were Financials, Industrials and Consumer Staples. The worst performing countries were Taiwan, Qatar and Singapore; and sectors were cash (a big drag in the month), Communications and Energy (perhaps counter-intuitively given the OPEC cut) – albeit with the last two sectors contributing positively.

Market Update

Emerging Markets (excluding China) rose 5.14% in October – which was OK in absolute terms, but underperformed global equities by 1% and US and European markets by ~2%. This was mainly a function of increased risk appetite on hopes of a policy pivot by the Federal Reserve. The rally in developed markets felt contrarian and built on hopes rather than any fundamental improvement in the outlook for business. Broadly, economic growth expectations are falling across the globe with Emerging and Developing economies now projected to grow 3.7% this year, down from 6.6% in 2021. Latin America enjoyed another relatively strong month. Brazil had a mixed time – rallying strongly on the tighter than expected first round election results which – crucially – delivered a conservative Congress and forced Lula to engage centrists to get “over the line”, implying a more moderate economic policy framework. The market then fell during on policy shifts before rallying again hard after Lula’s victory as Bolsonaro conceded defeat and removed a key tail-risk of civil unrest. Mexico delivered robust performance, as the near-shoring theme came to the fore. The market was led by Grupo Financiero Banorte, the leading local bank, which rose 26%. This is a well run financial institution with deep pools of excess capital, an impressive commercial and retail offering – especially digital distribution. The shares had been relatively soft this year on the back of speculation that the management would acquire Citi’s Mexican business and thus deploy its capital in a potentially dilutive transaction – rather than returning excess capital to shareholders. The market was relieved when they announced they would be withdrawing from the process. This paved the way for the implied ROE dilution discount to be removed: management firmed up their credibility for disciplined capital management and can now deploy excess cash in organic growth projects (e.g. a credit card business) and increasing their dividends. FEMSA, the Mexican beer, logistics and consumer conglomerate, also performed reasonably well – rallying just over 14%. The EEMEA region showed a total reversal of the previous month’s performance. On the one hand, Eastern Europe rallied strongly with Turkey, Poland and Greece the best performing markets in the Fund’s universe; but on the other MENA was relatively soft.

Turkey continued to defy the monetary policy orthodoxy with strong local flows into the only viable inflationary protection domestic investors can access – equities. The market received an extra boost, however, with falling gas prices (-6%), of which Turkey is dependent. Poland is facing a relatively gloomy outlook but that is increasingly priced in with the market now trading at its cheapest valuations for many years. Banks rallied aggressively on the hope of a better than expected macro outlook for both consumers and corporates after the Central bank held rates in their October meeting – whilst enjoying the NIM tailwinds from previously aggressive hikes with rates rising from 1.25% in December 2021 to 6.75%. Greece is somewhat of a dark horse in Emerging Markets. Downgraded after the Euro crisis, it was in a perpetual state of national restructuring until, finally, it seemed that the bail-outs and capital raises had ended a couple of years ago. Hence, the banks have been solid performers – thanks to pariah status valuations and cleaned up balance sheets; and smaller consumer and industrial names have received more attention from EM investors than they certainly would were they included in MSCI Europe or World. At the other end of EEMEA we had a muted month from MENA. UAE rose 6% but Saudi was approximately flat and Qatar fell, despite OPEC’s decision to cut production, mainly on a lower gas price. In Asia, South Korea rallied on better earnings – particularly from their EV supply chain. Taiwan was weak – again – as Apple downgraded their iPhone shipment expectations and Xi’s comments on the island.

Fund Performance & Positioning

Certain markets were relatively volatile – particularly Brazil. We deployed a significant amount of cash in a short amount of time at the back end of September and into October – a function of both flows and positioning. Despite that, cash still cost ~80bps on the month. From a sector attribution perspective, Industrials were the largest positive contributor (in absolute terms too). Industrials is a broad and heterogenous sector across our markets, and four companies in three countries were the main positive contributors. WEG in Brazil was the largest, adding 55bps in the month. This delivers electric motors and energy transmission products to industrial and utility customers, where they enjoy secular growth. They are helped by tailwinds from electrification and the customer mix (domestic and foreign) rendering the company well hedged from a macro perspective: when the BRL devalues they are more competitive internationally; when the domestic market is strong, they enjoy greater demand. Localiza was another Brazilian winner, adding 14bps and rallying after the election. This is the largest rental car and fleet operator in Brazil by a factor of 2+. They are capital allocators and having held off growing their fleet during the supply constrained times of 2020-2021, are now adding cars into a softer pricing environment as demand rises in the country. This is coupled by softening expectations around rates in Brazil (thanks to their 2021 aggressive action) and their final digestion of a meaningful acquisition. Mytilineos, a Greek aluminium and energy business, contributed 31bps. It is enjoying the tailwinds of several years of careful restructuring. EBIT was initially forecast to double this year but results in the month indicate that it may exceed this, against a backdrop of a modest valuation. LG E&S, a Korean battery manufacturer, was the other positive contributor (31bps) after rising 24% in the month as profitability is starting to kick in thanks to scaling growth.

Consumer Staples was the second biggest positive contributor, for the second month, adding over 50bps on a relative basis and 1.5% in absolute terms. Here Brazil was again at the forefront with Raia Drogasil – the Brazilian pharmacy chain we added earlier in the autumn – which delivered strong results based on by robust market share expansion. FEMSA in Mexico also rallied slightly from a low base in the month. We are actively engaging management on these strategic asset allocation and ESG issues in an effort to unlock value. Information Technology was the next biggest contributor in the month. We remained positive on the broad sector but selective in terms of sub-sectors – given the vast differences in growth outlooks. Our underweight to Taiwan Semiconductor helped as the outlook for semiconductor demand remained uncertain (despite very robust results). We closed our underweight to Samsung Electronics as the company was materially oversold. The biggest positive contributors were TOTVS, the Brazilian ERP company; and Logo, a Turkish ERP company focusing on SMEs. Given how underpenetrated this market is, buying it on mid-single digit forward earnings felt too cheap. Whilst the country macro remains extremely unusual and, to an extent, unsettling, the fact remains that there are some extremely high quality growth companies with proven management teams in Turkey. On the negative side, Communications services was the weakest sector costing us over 50bps. This was predominantly a result of Chunghwa Telecom and Saudi Telecom – both of which hurt; as well as some sins of omission as Emirates Telecommunications (U.A.E.) and America Movil (Mexico), which both delivered low teen returns. Financials also lagged, mainly a function of our underweight despite solid absolute returns. Chailease, a Taiwanese leasing business operating regionally, was the biggest faller as concerns rose around their business in mainland China.

Outlook

We shall see the extent to which strong market performance this month on the expectations of a Federal Reserve pivot is sustainable. Markets remain exposed to higher rates as the data in the US – at least in the labour market – is still strong. This means the traditional EM headwind of a strong US dollar is a continued reality. Despite this, specific countries (Brazil, Mexico, Saudi Arabia, Qatar, U.A.E, Indonesia, India etc.) are tactically and structurally well positioned. Other markets suffering from cyclical pressure currently are likely to offer substantial opportunities in the coming twelve months. Whilst the current resilience of EM FX is leading to some head-scratching, core markets are less exposed at the debt level, enjoy deeper capital markets and have been stewarded by Central Bankers not afraid to take difficult decisions. India is the one country of those named above where the tactical case is marginally less robust. Recent results around Diwali have been extremely robust, justifying the relatively lofty valuations. We remain overweight – indeed lots of foreign buyers have returned to the market as oil has come off in recent months, the property and capex cycle remains supportive and industrial activity has been robust (PMIs >53). But we are in the mode of taking profits at the margin, as we did last month. The Rupee has devalued ~10% over the past year and there remains a terms of trade headwind given oil prices and political pressure (being resisted, fairly from an Indian perspective) to reduce energy imports from Russia. Flows are another consideration: long India / short China has been a winning trade in the last year or so, generating ~28% of relative performance. Clearly China is set up to rally here and India may be a source of funding for that, especially within Asian funds. The Brazilian market has navigated Lula’s election reasonably smoothly. We are in the situation where the market is rallying on Bolsonaro’s acceptance of the result (removing a tail-risk of civil unrest) and expectations that Lula’s economic policies will be relatively constrained. What we don’t know is who he will select as his finance minister. This is key for the medium term direction of a market that remains, in terms of vibrancy and dimensionality, amongst the most exciting in our universe. We have retained our large cap positions. In the medium term we are cognisant of the cyclical vulnerability of banks: whilst still cheap today, and due some re-rating, they are interest rate sensitive and as rates are likely to fall in Q2 / Q3 ’23.

To update on cash (which stands at <4% today), after reducing and then increasing positioning in October, our view is essentially the same: we have room to add to specific sectors and regions where there may be some cyclical recovery. In North Asia, key areas continue to see inventory build and guidance for Q4 for many suppliers is coming in worse than expected. That said, panels that go into displays for TVs and monitor screens is finally showing pricing bottoming and that was the first area of demand to fall so we will are more likely to marginally increase our exposure vs. reduce from here. Parts of EEMEA show particularly distressed valuations – and this has been indiscriminate. As usual, the company quality bar is set high for incremental ideas. Given the current economic outlook we remain positive on the energy sector specifically the value chain. From a oil price perspective, we are relaxed: demand has been constrained by China’s lock-down and despite Russian gas flowing – consistently – since the invasion and a record USD, volumes have easily been absorbed. Supply is itself materially constrained with OPEC cutting in the short term and Adnoc outlining the fact that we are losing 5m boe / day each year if capex doesn’t ramp up. This leaves the outlook for the market extremely tight. This also indicates the robust position the oil and gas value chain is in – after a decade of losses and consolidation, a capital cycle is playing out clearly here. In terms of style, we remain growth biased, but with perhaps more of a blend than perhaps we would normally like given the ongoing market rotation and trajectory of interest rates, particularly in the US. We are consistently mindful of the divergent monetary policy environments. For outright growth stocks to start outperforming, US yield expectations would need to be lowered, largely driven by weaker US job data.

Disclaimer

For professional clients, qualified investors and accredited investors only. The value of investments and the income derived from them can fall as well as rise, your capital is at risk. Note: Past performance is not a guide to the future. Returns may increase or decrease as a result of currency fluctuations.

Performance contribution is gross of fees, all other performance shown is net of fees and expenses. Please refer to the Prospectus for further information on this Fund and prior to any subscription. All data sourced New Capital, EFGAM, Bloomberg, as at title date, unless otherwise stated.

Issued in the UK by EFG Asset Management (UK) Limited which is authorised and regulated by the Financial Conduct Authority (FCA Registration No. 536771). Registered No: 7389746. Registered address: Park House, 116 Park Street, London W1K 6AP. Telephone: +44 (0)20 7491 9111.

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A copy of the English version of the prospectus of the Fund and the key investor information document relating to the Fund is available on www.newcapital.com and may also be obtained from EFG Asset Management (UK) Limited. Where required under national rules, the key investor information document/the key information document will also be available in the local language of the relevant EEA Member State.

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A decision may be taken at any time to terminate the arrangements made for the marketing of the Fund in any EEA Member State in which it is currently marketed. In such circumstances, Shareholders in the affected EEA Member State will be notified of this decision and will be provided with the opportunity to redeem their shareholding in the Fund free of any charges or deductions for at least 30 working days from the date of such notification.
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Information for investors in Australia
This document has been prepared and issued by EFG Asset Management (UK) Limited, a private limited company with registered number 7389746 and with its registered office address at Park House, 116 Park Street, London W1K 6AP (telephone number +44 (0)20 7491 9111). EFG Asset Management (UK) Limited is regulated and authorized by the Financial Conduct Authority No.536771.
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Offering Documents
Neither this document nor any document under which Interests in the New Capital UCITS Fund plc (the “Fund”) are offered is a prospectus, product disclosure statement or other formal disclosure document under the Corporations Act. Interests in the Fund may not be offered, issued, sold or distributed in Australia other than by way of or pursuant to an offer or invitation that does not need disclosure to investors either under Part 7.9 or Part 6D.2 of the Corporations Act, whether by reason of the investor being a wholesale client (as defined in section 761G of the Corporations Act and applicable regulations) or otherwise. Nothing in this document nor any document under which interests in the Fund are offered constitutes an offer of interests in a financial product or financial product advice to a 'retail client' (as defined in section 761G of the Corporations Act and applicable regulations).
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Americas
The Company is an open-ended umbrella type investment company with variable capital authorised by the Central Bank of Ireland pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations, 2011 as amended. EFGAM and the Company are affiliated with EFG Capital International Corp., an SEC registered and FINRA/SIPC member broker-dealer.

Notice to Residents of the United States: Shares of the Fund may not be offered or sold, directly or indirectly, within the United States or to U.S. Persons (as defined in the Fund’s Prospectus).

Notice to Residents of Argentina: These shares may not be offered or sold to the public in Argentina. Accordingly, the offering of the shares has not been submitted to the Comisión Nacional de Valores (CNV) for approval. Documents relating to this offering (as well as information contained herein) may not be supplied to the general public for purposes of a public offering in Argentina or be used in connection with any offer or subscription for sale to the public in Argentina.

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Notice to Residents of Chile: Fecha de inicio de la oferta: [11.10.2013]
(i) La presente oferta se acoge a la Norma de Carácter General N° 336 de la Superintendencia de Valores y Seguros de Chile.
(ii) La presente oferta versa sobre valores no inscritos en el Registro de Valores o en el Registro de Valores Extranjeros que lleva la Superintendencia de Valores y Seguros, por lo que los valores sobre los cuales ésta versa, no están sujetos a su fi scalización;
(iii) Que por tratarse de valores no inscritos, no existe la obligación por parte del emisor de entregar en Chile información pública respecto de estos valores; y
(iv) Estos valores no podrán ser objeto de oferta pública mientras no sean inscritos en el Registro de Valores correspondiente.
(i) The commencement date of the offer and the fact that the relevant offer is made pursuant to this SVS Rule 336;
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Hong Kong
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Singapore
The Fund and the offer of the Shares / Units which are the subjects of this document do not relate to a collective investment scheme which is authorised by the Monetary Authority of Singapore (“MAS”) under section 286 of the Securities and Futures Act (Cap. 289) (the "SFA") or recognised by the MAS under section 287 of the SFA, and Shares / Units of the Fund are not allowed to be offered to the retail public.

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No offer of the Shares / Units for subscription or purchase, or invitation to subscribe for or purchase the Shares / Units, may be made, nor any document or other material (including but not limited to this document relating to the Shares / Units may be circulated or distributed, either directly or indirectly, to any person in Singapore other than: (i) to an institutional investor (as defined in section 4A of the SFA) pursuant to section 304 of the SFA; (ii) to a relevant person (as defined in section 305(5) of the SFA) pursuant to section 305(1) of the SFA; (iii) on terms that the minimum consideration is the equivalent of Singapore dollars 200,000 in accordance with section 305(2) of the SFA; or (iv) otherwise pursuant to, and in accordance with the conditions of, any other exemption under the SFA.

Pursuant to section 305 of the SFA, read in conjunction with regulation 32 of and the Sixth Schedule to the Securities and Futures (Offers of Investments) (Collective Investment Schemes) Regulations 2005, the Fund has been entered into the list of restricted schemes maintained by the MAS for the purposes of offering Shares / Units in the Fund to relevant persons (as defined in section 305(5) of the SFA), or, for the purposes of offering Shares / Units in the Fund in accordance with the conditions of section 305(2) of the SFA.

Where an offer is made to institutional investors pursuant to section 304 of the SFA, the following restrictions (under section 304A) apply to Shares / Units acquired pursuant to such an offer. Where such Shares / Units are first sold to any person other than an institutional investor, the requirements of Subdivisions (2) and (3) of Division 2 to Part XIII of the SFA will apply to the offer resulting in such sale, save where the Shares / Units acquired are of the same class as, or can be converted into Shares / Units of the same class as, the other Shares / Units:
i. which are listed for quotation on an approved exchange (as defined in the SFA); and
ii. in respect of which any offer information statement, introductory document, unitholders’ circular for a reverse take-over, document issued for the purposes of a trust scheme, or any other similar document approved by an approved exchange (as defined in the SFA), was issued in connection with an offer of those Shares / Units, or the listing for quotation of those Shares / Units.

Where an offer is made to relevant persons pursuant to section 305 of the SFA, the following restrictions (under section 305A) apply to Shares / Units acquired pursuant to such an offer. Where such Shares / Units are first sold to any person other than (i) an institutional investor; (ii) a relevant person; or (iii) on terms in accordance with section 305(2) of the SFA, the requirements of Subdivisions (2) and (3) of Division 2 to Part XIII of the SFA will apply to the offer resulting in such sale, save where the Shares / Units acquired are of the same class as other Shares / Units:
i. which are listed for quotation on an approved exchange (as defined in the SFA); and
ii. in respect of which any offer information statement, introductory document, unitholders’ circular for a reverse take-over, document issued for the purposes of a trust scheme, or any other similar document approved by an approved exchange (as defined in the SFA), was issued in connection with an offer of those Shares or Units, or the listing for quotation of those Shares / Units.

Further, where the Shares / Units are acquired pursuant to an offer made in reliance on section 305 of the SFA and the acquirer is:
a. a corporation which is not an accredited investor (as defined in the SFA), whose sole business is to hold investments and the entire share capital of which is owned by individuals each of whom is an accredited investor); or
b. a trust of which the trustee is not an accredited investor and whose sole purpose is to hold investments for the benefit of beneficiaries each of whom is an accredited investor,
then no securities of such a corporation and no rights and interests of the beneficiaries in such a trust (as the case may be) shall be transferred for a period of 6 months from the time the corporation or trust (as the case may be) acquired the Shares / Units, unless such transfers are in accordance with the conditions specifically provided in sections 305A(2) and 305A(3) of the SFA (as the case may be).