Quarterly Fund Commentary
Ivy Managed European/Pacific Fund (prospectus)
June 30, 2010
Manager(s):
Michael L. Avery
Market Sector Update
Global markets were volatile during the second quarter of 2010. Government debt, politics and mixed economic signals left investors on guard and with little direction. Concerns over sovereign credit risk driven by Greece continued to roil the markets and heightened tensions between North and South Korea added fuel to the uncertainty and volatility. Spain, Italy and peripheral countries, including Ireland and Portugal, continue to weigh on Europe's economic recovery. Asian markets also struggled but generally outperformed the United States, Europe and Japan. In China, in an effort to control the overheating in the real estate market, stringent measures were announced in April, including raising minimum mortgage rates and down payment ratios for some home purchases. Officials are also considering a trial property tax which has led to a drastic reduction in transaction volumes and falling property prices. In June, China launched a round of minimum wage hikes following labor disputes and a string of worker suicides. Korea was particularly impacted by the European turmoil as corporate profit growth was offset by concerns that export demand will be hurt by Europe's sovereign debt crisis and increased tension between North and South Korea dampened sentiments. India's stock market was a relative outperformer on sustained industrial growth and non-farm loan growth. The Indian central bank has decided not to front load its rate hikes in the current context of global uncertainty emanating from Europe and is instead following a path of gradual tightening.
Portfolio Strategy
The Fund's allocations changed very little. The Fund remains well-diversified across Asia, with the greatest exposures in China, India, South Korea, Taiwan and Singapore. We remain overweight in China. We believe the market concern about a property bubble and economic hard landing in China is overblown. We believe corporate earnings will continue to surprise on the upside. We selectively added some positions in India as we believe certain sectors are more attractively positioned. Towards end of the quarter, we added back positions in the Chinese banking sector as valuation appeared quite attractive. We reduced our position on Chinese banks toward the end of last year based on our concern of potential capital-raising activities in coming months and potential policy changes from the Chinese central bank. At current valuation, we believe risks have already been priced in. We have continued to move down the capitalization range, an effort we began in the previous quarter.
Outlook
We still see a mixed picture for many European economies. The sovereign debt crisis facing Greece is a dark cloud that continues to hover over European markets, although the European Union appears to be holding together. Some other countries have begun to reign in their fiscal stimulus which could create some difficulties. That said, central banks are keeping rates low and inflation remains benign which are positive signs. We do not believe we will see a deflationary environment develop. Private consumption remains low across Europe due to unemployment. Due to the Greek turmoil and high budgets, we think it is likely that European currencies may remain under pressure for some time to come. We will be watching for any signs of further monetary and fiscal tightening and withdrawal of stimulus in China. Other Asian banks may raise rates in coming months, and the equity markets may respond negatively, but history shows that equity markets normally perform quite well during the cycle. We also will continue to watch commodity prices. With a better than expected recovery of the U.S. economy, there should be increased competition for commodities which could further add to inflation risks across Asia.