The Causeway Emerging Markets UCITS Fund (“Fund”), on a net asset value basis, outperformed the Index in August 2023. We use both bottom-up “stock-specific” and top-down factor categories to seek to forecast alpha for the stocks in the Fund’s investable universe. Our bottom-up factor categories, valuation, earnings growth, technical (price momentum), and competitive strength, were all positive indicators during the month. Of our top-down indicators, macroeconomic and currency were positive. Country and sector were negative indicators in August.
Economic Outlook
Economic data in the US continue to suggest that inflation is moderating, lowering the likelihood of further rate increases by the US Federal Reserve (“Fed”). The dramatic size and pace of Fed interest rate increases over the last few years have been a headwind for EM assets. As we approach the end of the Fed’s current rate hiking cycle, the outlook for EM equities and currencies should improve. Within EM, the Central Bank of Brazil lowered its target rate by 50 basis points in August. With real interest rates near the highest level of all major countries globally, Brazil has ample room to reduce interest rates. Furthermore, like many developed countries, Brazilian inflation has been moderating. In contrast, Argentina’s currency fell during the month and the country’s central bank increased interest rates by 21 percent to combat rising prices in the country. Strong support for Javier Milei in the primary vote contributed to economic uncertainty as he has vowed to eliminate Argentina’s central bank and dollarize the economy. In the Fund, we have a small overweight position in Argentina expressed through two companies, both with relatively little exposure to Argentina. One company is an e-commerce business that derives most of its revenue from Brazil and the other is an integrated energy company whose performance is more correlated with global oil prices.
In emerging Asia, Chinese data continues to reflect an anemic recovery for the largest EM country’s economy. July retail sales and industrial production data fell short of expectations and Chinese authorities ceased reporting youth unemployment levels, reflecting a pessimistic view towards one of the weakest areas of the economy. Given the lackluster economic data and tame inflation, we believe Chinese authorities will further stimulate the economy. While significant monetary easing appears unlikely given the economy’s debt load, we anticipate incremental, target support as and when needed. Authorities have recently stimulated growth by cutting the stamp tax on stock transactions, encouraging local governments to address debt risks using special bonds, and vowing to increase housing options for first-time homebuyers. We are overweight Chinese stocks in the Fund due in part to compelling valuations, as we believe the growth concerns are more than discounted in share prices. While almost all sectors are trading at significant discounts to their historic valuations, we currently are finding the most attractive opportunities in energy, industrials, financials, and interactive media companies. We are underweight companies in China’s real estate sector, a particularly vulnerable segment of the country’s economy.
Investment Outlook
As part of our continuous effort to enhance our quantitative model, we aggregated two “top down” factors, country and sector, in August. This country-sector aggregate factor combines country and sector analysis, recognizing that many sectors are locally-oriented and may not be comparable across countries, while other sectors are global in nature. For example, we believe comparing financials companies across countries has little predictive value as each country has its own central bank, interest rate dynamics, and macroeconomic drivers affecting the credit cycle. However, comparing energy or mining companies across different countries can be useful since these businesses tend to sell into a global marketplace. The country-sector aggregate factor has two components – self-relative valuation and earnings growth – and it has a 12.5% weight in the strategy’s alpha model.
Earnings growth upgrades for EM equities continue to lag those in ex-US developed markets. The sectors with the strongest net upgrades were consumer discretionary and communication services. Consumer discretionary’s strong upgrades reflect solid growth expectations for Chinese e-tailers, despite the slow rebound in Chinese growth. Communications services has been buoyed by a strong outlook for Chinese interactive media companies. On the negative side, net growth upgrades were weak for materials and information technology, reflecting slowing global growth. Within EM, we continue to identify, in our view, attractive investment opportunities in small cap companies. Historically, our investment process has uncovered EM small cap stocks with alpha potential. The Fund’s allocation to small cap stocks was near the high end of the historical range at month-end.
Emerging Markets UCITS Fund
Portfolio Attribution
The Causeway Emerging Markets UCITS Fund (“Fund”) performed in-line with the Index in April 2022. We use both bottom-up “stock-specific” and top-down factor categories to seek to forecast alpha for the stocks in the Fund’s investable universe. Our bottom-up valuation and price momentum factors were positive indicators during the month while growth and competitive strength were negative. Of our top-down factors, our macroeconomic and currency factors were positive. Our country and sector factors were negative indicators in April.
Investment Outlook
Earnings growth upgrades for EM equities continue to lag those in developed markets. EM sectors with the weakest earnings upgrades were communication services, consumer discretionary, and real estate. All three of these sectors are dominated by Chinese stocks, which were impacted by the Covid-19 lockdowns. The sectors with the strongest earnings upgrades were energy, information technology, and financials. Energy benefitted from strong oil prices and information technology benefitted from positive revisions for a few larger capitalization stocks. Financials benefitted from rising interest rates. The countries with the weakest net upgrades include China, India, and Thailand. While Covid-19 containment policies have weighed on Chinese stocks, rising commodity prices have dampened the growth outlook for Indian equities. The countries with the strongest net upgrades include Taiwan, Turkey, and Mexico. Positive revisions for larger capitalization companies drove strength in Taiwan. We are overweight Taiwanese stocks in the Fund due to attractive bottom-up and top-down characteristics. Mexican stocks have benefitted from economic linkages with the US. While we incorporate growth expectations into our multi-factor investment process, we continue to emphasize valuation in our approach. With a balance of favorable valuation, growth, and price momentum characteristics relative to the Index, we believe the portfolio provides outperformance potential looking forward.
Global Value UCITS Fund
Portfolio Attribution
The Causeway Global Value UCITS Fund (“Fund”) outperformed the Index during the month, due primarily to stock selection. Fund holdings in the capital goods, health care equipment & services, and materials industry groups contributed to relative performance. Holdings in the insurance, pharmaceuticals & biotechnology, and banks industry groups offset some of the outperformance compared to the Index. The top contributor to return was jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom). Other notable contributors included healthcare equipment & services provider, Koninklijke Philips NV (Netherlands), and travel & tourism technology company, Sabre Corp. (United States). The largest detractor was electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea). Additional notable detractors included Asian life insurer, Prudential Plc (United Kingdom), and global financial services giant, Citigroup, Inc. (United States).
Economic Outlook
Economic signals in developed economies are mixed. In August, US wages rose year-over-year and employers added jobs, yet the unemployment rate crept up to 3.8%. The core personal consumption expenditures price index rose 0.2% in July, the smallest uptick since late 2020, yet inflation-adjusted consumer spending experienced its greatest increase year-to-date.Euro
area inflation for the year-to-date through August period was 5.3%, well exceeding the central bank’s 2% policy target, although consumer price increases excluding energy and food cooled. Central bank officials must assess if slowing growth can sufficiently reduce inflation or if further rate hikes are warranted. We expect unemployment to rise in the US, UK, and Europe in the first half of 2024 as credit conditions tighten further. The Bank of Japan stated its economy may be reaching a turning point in its 25-year battle with deflation. Official measures showed Japanese demand outpacing supply for the first time in four years.
All eyes are on China as the world’s second-largest economy grapples with a slumping property sector and slowing real GDP growth. China is deploying measures to shore up its property market and address vulnerabilities in its financial system and currency, yet investors remain concerned about the repercussions of flagging Chinese activity on the greater global economy. In coordination with members of our Shanghai-based research subsidiary, Causeway analysts are performing diligent research on companies exposed to the Chinese economy, including goods and commodities suppliers and links in Chinese supply chains.
Investment Outlook
In 2023, global equity markets have signaled economic slowing ahead via the underperformance of cyclical sectors such as financials, materials, and industrials. Yet economically defensive sectors such as utilities, consumer staples, and healthcare also have, uncharacteristically, underperformed. In contrast, information technology—in international and emerging markets as well as the tech-dominant US market—is the largest outperforming sector by a wide margin this year-to-date. We believe enthusiasm for artificial-intelligence-related applications has overwhelmed concerns about economic sensitivity. As technology garners most of the attention, we are looking at more unpopular areas of markets. Our team aims to find investment opportunities in companies that can accelerate earnings and cash flows (“underearners”), largely independent of broad macroeconomic trends. These include currently misunderstood and out-of-favor companies in industries such as insurance, chemicals, and consumer non-durables.
In an environment where expensive stocks may be increasingly vulnerable to de-rating, we believe Causeway fundamental client portfolios should be relatively resilient against valuation multiple compression. We generally use conservative assumptions in our stock valuation models, adhere to a multi-year investment horizon, and integrate in-house quantitative risk analysis into our portfolio construction process. Market volatility provides our portfolio management team an opportunity to add to vetted investment candidates at attractive entry points, supporting our efforts to generate competitive returns on behalf of our clients.
Terms and Conditions of Use:
Please read the following before proceeding, as it explains certain restrictions imposed by law on the distribution of this information and the countries in which Causeway Funds plc is authorised for sale.
Causeway Funds plc (the "Fund") is authorised by the Central Bank of Ireland as an Undertaking for Collective Investment in Transferable Securities pursuant to the European Communities (Undertaking for Collective Investment in Transferable Securities) Regulations 2011 (S.I. 352 of 2011) of Ireland, as amended.
The Fund and its sub-funds are only authorised in certain jurisdictions.
This website is not aimed at any US person (as defined by Regulations S of the US Securities Act of 1933) and is not for distribution and does not constitute an offer to or solicitation to buy any securities in the United States. Purchase orders from US investors or other ineligible investors will not be accepted. This site is not intended for US persons. If you are trying to find information about the Causeway Funds registered for sale in the United States, please go to our Funds page . Restrictions may also apply to residents of other countries.
Subscriptions will only be received and shares issued on the basis of the current prospectus for the Fund and relevant supplement for a sub-fund. It is your responsibility to use such prospectus and supplement, and by making an application you will be deemed to represent that you have read such prospectus and supplement and agree to be bound by its contents. Copies of the prospectus, supplements and, when available, other reports can be obtained from this website. The Fund prices contained in this website are indicative only and should not be relied upon for dealing. No warranty or representation is made with respect to the information contained in this website, including, without limitation, that the information is accurate, complete or timely. None of the information, whether in part or full, should be copied, reproduced or redistributed in any form. Past performance is not indicative of future results.
The information on this website is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security that may be referenced on or through this website. Unless otherwise specified, it is not intended to be directed to any person(s) in particular. Information from this website must not be used in any jurisdiction where prohibited by law and must not be used in a way that would be contrary to local law or legislation. You should not access this site or information on this site if you know that your access would contravene applicable local, national or international laws. No investment advice, tax advice, or legal advice is provided through this website, and you agree that this website will not be used by you for these purposes. No representation is given that shares, products, or services identified on, or accessible through, this website are suitable for any particular investor.
By clicking the box below, you confirm and represent that you are from an eligible jurisdiction to review material relating to the Fund, or that you are authorised to conduct investment business in the jurisdiction within which you are resident and, under the law of that jurisdiction, you are authorised to view material relating to collective investment schemes). It is critical that the information you provide is accurate and a failure to provide accurate information will be a material breach of these terms and conditions.
If you are a resident of any other country please view our strategies.