I
n emerging markets, political change
can sometimes improve a country’s
development and economic growth
substantially. Mexico is one of the places
where we believe political change is
occurring. Since his inauguration on
1 December 2012, president Enrique
Peña Nieto has implemented far-reaching
reforms in areas such as education, taxation
and healthcare that have brightened our
investment outlook for the country.
Mexico is also bene ting from an in ux
of manufacturing formerly done in China
and elsewhere, especially for large items
– such as vehicles and appliances – bound
for US markets. In addition, low levels of
debt make the country’s nancial sector
particularly appealing to us. One of the
companies we added to the portfolio during
the third quarter was Grupo Financiero
Interacciones, which is a diversi ed nancial
services rm that provides funding to
state governments and municipalities for
public-works construction. It should bene t
as the Mexican government strives to rectify
years of infrastructure underinvestment.
The portfolio remains underweighted to
Korea and Taiwan. One reason for this
is that the countries’ preponderance of
electronics manufacturers makes it more
di cult to nd companies with su cient
returns on capital.
WASATCH
Emerging Markets Equity
Recent reforms have brightened
Mexico’s investment outlook
Mexico is bene ting
froman in ux of
manufacturing
Ajay Krishnan and Roger Edgley
THE INVESTOR CENTRE
THE INVESTOR
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37
E
conomic data has generally
disappointed over the summer,
suggesting that the global economy is losing
momentum. Europe in particular faces a
very challenging outlook, with structural,
cyclical and geopolitical issues combining to
form a considerable impediment to growth.
De ation remains a key risk for the region
and further policy support looks necessary.
While speculation that the ECB will
initiate a programme of quantitative easing
continues to grow, the political barriers to
such a policy remain high, particularly from
within Germany.Without further policy
support, however, the outlook for the region
remains very troubling. Sovereign bond
yields have been declining all year, signalling
that the bond market is concerned that
the fundamental economic environment is
deteriorating.Thus far, despite the occasional
wobble, equity market performance
suggests continued complacency about the
economic outlook.We are not complacent,
however, and continue to advocate a cautious
investment strategy with a focus on the
long term.We continue to favour high-
quality, dependable growth businesses with
proven business models and international
diversi cation.Valuations of companies
with these characteristics tend to be more
attractive than elsewhere in the market;
albeit, slightly less attractive in absolute terms
than they were a year ago. Nevertheless, we
remain con dent that we can deliver positive
long-term returns to investors.
WOODFORD
Income Distribution, UK Equity and
UK High Income
Global recovery losing momentum,
with QE likely for eurozone
Sovereignbondyields
have beendeclining
all year
Neil Woodford
T
he main themes during the third
quarter of 2014 have been the
improved strength of the US economy
and the continuing geopolitical tensions
in Russia and Ukraine. US economic data
has continued to improve through Q3, and
Q2 annualised GDP was revised up from
4.0% to 4.2%. Labour and housing metrics
were also positive during the period and the
possibility of an earlier-than-anticipated hike
from the Fed, possibly in the rst quarter
of 2015, remains on the table.The fragile
growth we have been seeing from Europe
looks under threat as the impact of sanctions
on exports to Russia is estimated to take
about 0.8% o euro-area GDP. However,
ECB president Mario Draghi did announce
easing measures to help support growth in
the eurozone.The UK economy advanced
0.8% in Q2, which takes the annualised
rate of economic growth to pre-crisis
levels of 3.1%.The conundrum of strong
employment trends but muted wage growth
persists; this gives the Bank of England a
reason not to hike rates as early as some
may be anticipating. Other counters to the
hawkish view are the strong pound and
falling in ation.
WELLINGTON MANAGEMENT
Gilts
UK Gilts
US labour and housing were positive,
while growth in Europe looks fragile
US economic data has
continued to improve
throughQ3
Haluk Soykan
