Market Commentary as of 6/30/08
Global Slowdown
The second quarter of 2008 saw the reassertion of the financial crisis that has dominated the markets for the last eight months. In addition, an unprecedented surge in oil prices has, in real terms, driven the commodity back to its highs of the 1970s and 1980s. Ultimately, these events are all likely to culminate in a global slowdown in the coming months.
These factors are most heavily affecting developed markets, especially those of Europe, which are beginning to lose their traction in terms of earnings growth. Financials, and in particular banks, have been the worst hit. Therefore, Neptune is continuing its policy of maintaining no exposure to banks and insurers in developed markets.
The financial crisis has also begun to have an impact on consumer facing sectors in developed countries as well, as the availability of credit lessens and the cost of borrowing becomes increasingly more expensive. Hence, we have lowered our exposure to these sectors in the developed markets and are holding tactical cash at a slightly higher level than normal in order to take advantage of buying opportunities as they present themselves.
Emergence of Emerging Markets
Despite the widespread market volatility, emerging markets are largely managing to offset the global slowdown. They are proving to be far more resilient than expected, with Brazil, Russia, India, and China together accounting for 50% of US GDP in 2007. They have the clout, critical mass, and foreign exchange reserves to cope with a mild global economic slowdown. Russia, for instance, has maintained its overall growth due to a burgeoning middle-class population and the rise of the Russian consumer, along with the government's timely expenditure of its fiscal surplus—particularly in regards to infrastructure.
Asian markets regarded as "emerging" continue to prove sensitive to swings in global investor sentiment. We believe the long-term growth potential they offer makes them an extremely attractive investment prospect, however. Furthermore, given the current global credit situation, the fact that Asian companies are so under-leveraged compared with Western competitors means that they present substantially lower levels of balance sheet risk. At current valuations, we believe the risk-reward equation is favorable.
The Fund's investment process rests on a global industry and sector research platform, and it continues to bring forward a wealth of fast growing opportunities in emerging and developed markets. While markets remain challenging, we are cautiously optimistic regarding the remainder of 2008. We have largely succeeded in protecting the Fund against the worst of the credit crisis, and going forward anticipate finding some excellent buying opportunities.
Robin Geffen, Fund Manager and Managing Director, Neptune Investment Management Limited.
The views expressed above are for informational purposes only and is not intended as investment advice. Since the date of the commentary, economic, market conditions and the portfolio manager's views may have changed. Holdings and weightings are subject to change daily. Holdings are provided for informational purposes only and should not be construed as a recommendation to buy or sell the securities mentioned.
Past performance does not guarantee future results. Investment return and principal value of mutual funds will vary with market conditions, so that shares, when redeemed, may be worth more or less than their original cost.