Oil sector remains uncertain

February was another volatile month, and sentiment is still governed largely by macroeconomic news. Mona Stenmark, who manages the Carnegie Emerging Markets fund, summarises the past month.

India’s budget dispelled some concerns among investors, since it was better than expected. Its focus is to keep the deficit under control while stimulating growth.

China cut its reserve requirement by 50 basis points, freeing up market liquidity and promoting growth. Latin America as a whole performed well during the month, but ratings institution Moody’s followed S&P’s lead and downgraded Brazil, which is in recession and faces major economic challenges.

Exposure to China was trimmed back by selling insurance company China Life and car rental company CAR Inc. The insurance industry has recently been weak, and this negative trend is expected to continue due to the weakening macro economy. Uncertainty about CAR has intensified as the company has outstanding loans in US dollars that become more expensive as the Chinese renminbi weakens. One new Chinese holding is internet company Alibaba. This stock has previously traded at very high levels, but has slipped back with the stock market turbulence, and we are therefore taking the opportunity to buy into the company. Indian Sintex was successively sold during the month. Weakness in the Indian market has made the share relatively illiquid, and it is difficult to see any short-term catalysts that would cause the share to rise. Russian Lukoil was sold during the month as the oil sector outlook remains uncertain.

In Mexico, the fund reinvested in cement company Cemex. This company issued a positive earnings report, suggesting the worst difficulties are over and the share’s negative trend may be broken. Exposure to Brazil was increased through an investment in meat producer JBS. This company benefits from the weak real, and a good buying opportunity has arisen as the share fell to extremely low levels on rumours of corruption related to lending from state bank BNDES.

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