Ninepoint International Small Cap Fund Market View

February 28, 2020

Dear Clients and Colleagues:

The real impact of the coronavirus disease outbreak is difficult to assess at this time. Since last week, we are  seeing growing concerns about regional contagion after South Korea, Italy and Iran reported a spike in number of cases. In the coming weeks, a broader demand slowdown is at risk. Further, the global economic impact of coronavirus is likely to be higher than during the severe acute respiratory syndrome (SARS) outbreak in 2003. Back then, China’s proportion of global exports was only 5%, as opposed to 10% today.

Located in the Hubei province, Wuhan is an important hub for automotive, semiconductors and medical devices. In recent weeks, supply chains were disrupted due to Chinese New Year, the extra week closure and the virus outbreak. Manufacturing companies are gradually increasing production but their level of activity could remain below average in the short term. Capital goods companies exposed via both their direct sales exposures to China or their production footprints are affected. Additionally, freight volume is expected to decline. In short, manufacturing could be facing few weeks of disruption before things return to normal.

Airlines and tourism-related businesses have been impacted by the travel bans imposed on Chinese visitors. Major European airlines have about 2% to 5% of their available seats on Chinese routes. In term of airport spending, Chinese consumers generate about 14% of retail revenue at the Paris and Frankfurt airports. The Asia-Pacific region, which is more dependent on Chinese travelers, could suffer more than other regions. Countries like Thailand, South Korea and Japan have among the highest share of outbound Chinese tourism.

With consumers staying home and avoiding nonessential shopping as a health precaution, retailers are not immune. Companies such as Nike and Burberry have reported a sharp decline in customer traffic and purchasing activity. On a sector basis, this year the energy, the materials and consumer staples sectors have been among the worst performing to-date. However, sectors that are more domestic focused like Banks, Real Estate and Utilities have outperformed.

It is still too early to assess the full impact on our holdings. We believe that our consumer-related companies like Autogrill, Melia or L’Occitane are the ones most exposed. Autogrill is a concession business offering food and beverage to travelers around the world. Their European and American operations are performing well so far this year but their sales exposure to Vietnam and China has been impacted. These two countries represent only 1.2% of Autogrill’s revenue. More worrisome is their Italian operations which represent 19% of their revenue. The coronavirus outbreak in Italy over the past weekend has contributed to a notable drop in traffic on their motorways. L’Occitane is a cosmetics and well-being products manufacturer and retails globally. Their Hong Kong and Chinese exposure accounts for 20% of their total sales. Like any other retailers, L’Occitane could face an important drop in footfall in Q1 2020.

Melia is one of the leading European hotel groups; it owns and manages more than 326 hotels and resorts in 33 countries, mainly in America and Europe. Compared to its peers, Melia is less dependent on China. Chinese tourists represent 1.6% of the group's clientele, mainly concentrated in hotels operating in China and Southeast Asia. Spain received 600k Chinese tourists in 2018 from nearly 83 million. The only hope in the short term is that certain geographical areas may benefit from the closure of many Asian destinations.

Depending on the duration of the outbreak, we could see a V-shape recovery somewhere between the second and third quarters of 2020. That also depends if the coronavirus follows the same path as SARS in 2003. Now that coronavirus has expanded elsewhere, other countries could face similar challenges.

Our portfolio strategy has not changed; we continue to maintain a well-diversified portfolio minimizing industry and currency risk while adding value through security selection in both up and down markets. We believe the current market environment will create investment opportunities.

Have a great weekend.

The Global Alpha team

MONTHLY RETURNS (%) AS AT JANUARY 31, 2020, SERIES F

1M YTD 3M 6M 1YR INCEPTION
Fund -1.6 -1.6 3.9 8.0 13.6 4.0
Index -0.9 -0.9 4.2 9.4 13.1 1.1

1 All returns and fund details are a) based on Series F units; b) net of fees; c) annualized if period is greater than one year; d) as at January 31, 2020; e) since inception (March 15, 2018). The index is 100% MSCI EAFE Small Cap NR USD (CAD) and is computed by Ninepoint Partners LP based on publicly available index information.

Ninepoint Partners LP is the investment manager to a number of funds (collectively, the “Funds”). Commissions, trailing commissions, management fees, performance fees (if any), and other expenses all may be associated with investing in the Funds. Please read the prospectus carefully before investing. The indicated rates of return for Series F of the Funds for the period ended January 31, 2020 are based on the historical annual compounded total returns including changes in [unit/share] value and reinvestment of all distributions or dividends and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication does not constitute an offer to sell or solicitation to purchase securities of the Funds.

The Fund is generally exposed to the following risks. See the prospectus of the Fund for a description of these risks: ADR risk; Concentration risk; Credit risk; Currency risk; Cybersecurity risk; Emerging markets risk; Foreign investment risk; Inflation risk; Liquidity risk; Market risk; Regulatory risk; Securities lending, repurchase and reverse repurchase transactions risk; Series risk; Small company risk; Specific issuer risk; Sub-adviser risk; Tax risk.

The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction.

The opinions, estimates and projections (“information”) contained within this report are solely those of Ninepoint Partners LP (“Ninepoint”) and are subject to change without notice. Ninepoint makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, Ninepoint assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. Ninepoint is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances.

Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Ninepoint Partners LP. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell.

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