During the quarter, the Fund increased its cash position to a whopping 42% as China-India and Russia were still in down trending markets.  The asset allocation at year-end was India 26%, Russia 17%, and China 15%. Valuations Values starts at this point to become compelling.
China had another leg down of performance during the quarter and was the worst stock market in 2018. The poor sentiment, fueled by the trade war with the USA resulting in dreadful performance which is why we have a PE of 10.5 x, a decade low.  75% of GDP growth comes from domestic consumption and exports contribute less and less to GDP growth.  All newly introduced government initiatives should kick in during Q2-19.

Going forward, we stare at record low valuations, fiscal stimulus introduced by the government, the largest emerging markets tracker, the MSCI, which will increase the A-share exposure in May/June of this year.  ON top of this, both the US and China have incentives to find a solution to the dragged out trade war situation. Taking a contrarian view may favor the China A-share market this year. The year of the PIG kicks off when the Chinese New Year comes on 5th February.

In India, foreign investors sold about $5bn worth of stocks during Nov/Dec and the steady inflow from domestic investors of $1 billion a month took a breather. This trend improved in the last part as we started to see some insider buying, share buy-backs and net inflow into the market. The key commodity for India, the crude oil, saw huge price volatility hitting a high of 86 during the quarter before dropping 40%.  Oil above 70 is bad for India as it translates into fiscal inflation, interest rates worries and the currency is affected. We also saw huge instability in the rupee moving from 65 to 74 on the US dollar and back again. Benign Inflation helped but 2018 was a year that went full cycle.  Large-cap stocks held their ground, mid-caps fell as much as 30-40%. Market valuations look fair and reasonably priced.

Ahead, the macro perspective with inflation and growth looks positive for investors. If the price of crude will not do anything funny and trade in the range of 50-65, we should be fine. For the upcoming May election, it may prompt politicians to spend more. The current account is fine and should be managed under 2%, mainly financed by foreign investments and inflow.  Long term credit growth has increased and with GDP growth of around 7+%, reasonable inflation, all pointing to sustain high GDP growth rate going forward and fingers crossed that Prime Minister Modi will be re-elected in May! Russia ended the year on a weak note losing 4-5%, which was in line with global markets. Domestic stocks suffered badly from a lower than expected ruble rate along with weakness among the retailers.  The Central bank hiked the key rate by 25bp to 7.75% in December.

The largest bank in Russia now trades at a P/E of 4x and close to a 10% dividend yield.  As a reminder, the bank has more than 14,000 branches, is one of the five largest employers in Russia, more than 150 million clients worldwide, over half of all mortgage lending in Russia and over 40% of the consumer loans.  The bank has 75,000 cash and self-service machines so a huge operator.

We saw some exciting corporate events taking place.   Gazprom suggested a slight increase to its dividend amount, whereas Lukoil announced an acceleration of their buyback program, giving a total yield of close to 10%.

The US Treasury announced that the deal was reached with Rusal/En+ to restructure their ownership which will allow sanctions to be lifted. If implemented, this will be a major positive signal for the market as minority shareholders would have come out unscathed.

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