During April the fund underperformed the MSCI Emerging Markets index by 1.8%. The largest relative detractor was China, in particular due to some weak market closes on US listed ADRs at the end of the month. Our Brazilian positions also suffered as markets were whipsawed by Fed rate cut expectations. A correction in US technology stocks also put pressure on our Taiwanese exposure. On the flipside we saw a positive contribution from positions in Eastern Europe as well as resource stocks.
Over the month we continued adding to our exposure in China, bringing it close to the weighting in the MSCI EM index. We have also topped up our exposure to gold miners although this remains modest at around 2% of the portfolio. This was funded by exiting some positions in Brazil and Taiwan although we remain overweight in both markets.
We have been cautious on China for a number of years although attractive valuations have increasingly been drawing us back into the market. At the start of this year, MSCI China was trading on a forward P/E of 8x, in line with historic lows set in 2015. We have continued adding to positions although keeping in mind that a number of structural headwinds were unresolved. The economy remained highly unbalanced with domestic consumption underrepresented, fixed asset investment declining from unsustainable levels and manufacturing being pushed into growing exports that the rest of the world did not want. Combined with a failure to address frozen property construction and local government debt levels, we felt policy paralysis could remain a serious drag on the market.
Lately there have been some tenuous signals that policymakers are aiming to address some of these issues which has helped drive something of a recovery. We have seen modest consumer subsidies for auto and white goods purchases as well as a renewed determination to complete and deliver unfinished real estate. While not substantial so far, at least we feel these are steps in the right direction. Equity valuations remain low and domestic interest rates highly supportive. This combination is keeping us invested in the market, despite China already being the best performing major equity market this year in US$ terms.
We are generally avoiding Chinese companies exposed to trade conflict such as autos and semiconductors. Our positioning in China remains tilted towards domestic consumption via internet stocks and local brands although we also have some investments related to a potential pick up in real estate completions. These should be the first sectors to benefit if China is to exit its current funk.
