Emerging Markets Spotlight - Online Opportunities

“Technological advancement, measured by the long-term change in the relative price of investment goods, together with the initial exposure to routinization, have been the largest contributors to the decline in labor income shares in advanced economies.” – IMF World Economic Outlook, April 2017

Whilst much of our focus is on conditions and developments in the emerging world, we must not lose sight of how changes in the advanced economies create opportunities and risks for our investments. It is from this perspective that we note the rapid rate of change in the US retail industry and its industry-specific and global implications.

2017 is proving to be the most brutal year for the industry since 2008. Credit Suisse estimate that there will be 8,600 store closings this year, compared to the 2008 historical peak of 6,200. High-profile bankruptcies and mass job layoffs have dominated the sector’s news, yet the economy remains healthy. US retail sales (ex-food, auto dealers, building materials and gas stations) rose 3.4% in the year to March 2017, compared with an overall 3.4% fall in 2008. Consumer confidence is at its highest in sixteen years. The problem is not one of demand, but of competition.

Amazon stood out in the stream of negative news year-to-date, announcing plans to hire 30,000 part-time workers at the same time as reporting first-quarter revenues of US$35.7bn, up 23% on a year earlier. The US retail industry, particularly in non-perishable goods, is being aggressively disrupted by online competition. The disruption in terms of jobs, companies and properties is severe, and this pattern is likely to spread to both other industries in the US and other countries. We feel this has three important implications for investors in emerging markets.

The first is to recognise the opportunity that online operators have in emerging markets. Three of the world’s five largest internet companies are Chinese, and we have significant exposure here. In addition we have holdings in South Korea and South Africa.Where we hold retail-type companies, we have ensured that they either are predominantly in the safer perishables sector or have a strong online presence.

The second is to look at the technologies that support the online world. We have holdings in the portfolio which have all benefited from significant demand for memory and processors in servers. We also see mobile internet in India as one of the most exciting opportunities in the emerging world and have exposure here.

The third impact, which is more global in nature, is to recognize (as per the IMF quote above) that technology remains a major global deflationary force. If developed-market growth is to be both slower and less inflationary than in the pre-2008 period, emerging markets, which variously offer higher growth rates and/or higher yields, are likely to be the recipients of significant capital flows from the developed world.

An investor should consider the Fund’s investment objectives, risks, and charges and expenses carefully before investing or sending any money. This and other important information about the Fund can be found in the Fund’s prospectus or summary prospectus, which can be obtained at www.johcm.com or by calling 866-260-9549 or 312 -557-5913. Please read the prospectus or summary prospectus carefully before investing. JOHCM Funds are advised by J O Hambro Capital Management Limited and distributed through FINRA/SIPC member BHIL Distributors, LLC. JOHCM Funds are not FDIC-insured, may lose value, and have no bank guarantee.

RISK CONSIDERATIONS: The Fund invests in international and emerging markets. International investments involve special risks, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging markets. Such risks include new and rapidly changing political and economic structures, which may cause instability; underdeveloped securities markets; and higher likelihood of high levels of inflation, deflation or currency devaluations.

Emerging markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity.

The small- and mid-cap companies in which the Fund may invest may be more vulnerable to adverse business or economic events than larger companies and may be more volatile; the price movements of the Fund's shares may reflect that volatility.

The views expressed are those of the portfolio manager as of May 2017, are subject to change, and may differ from the views of other portfolio managers or the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice.

Securities mentioned above but not held in the Fund as of March 31, 2017, include Amazon and IBM.