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review and outlook — first quarter 2014
Market review
After a strong rally in 2013, stocks were relatively flat in aggregate amid investor doubts about the
Japanese economic recovery and worries about U.S. growth. Federal Reserve Chair Janet Yellen also
unnerved some investors by hinting that the Fed might raise interest rates earlier than expected.
However, market fears were tempered by strong corporate profits, greater optimism about European
economic growth, and assurances from major central banks that monetary policy would remain highly
accommodative for the foreseeable future. Overall, the MSCI EAFE Index rose less than 1%.
Despite deflationary pressures, most European markets rose, particularly peripheral countries like Italy
and Ireland. Japan had the worst returns of the major developed markets, losing 6%. A rising yen,
disappointing economic data, and worries about the impact of a sales tax hike spurred profit-taking after a
strong run last year. Developed economies generally fared better than emerging markets, which were
hurt by currency weakness, slowing economic growth in China and tensions over Ukraine.
Defensive stocks did better than cyclical sectors amid a clear flight-to-safety trend. The utilities sector
generated the strongest returns, rising 7% as lower interest rates provided a favorable environment for
dividend-paying stocks. Shares of National Grid, the world’s largest utility by market value, moved higher
after Moody’s upgraded the ratings on two of its U.S. subsidiaries. The health care sector was another
bright spot for investors, gaining 6%, with Roche, Novo Nordisk and AstraZeneca among the leaders.
Telecommunication services stocks lost 2%. Shares of Vodafone sank 11% as investors reacted
negatively to its takeover bid of Spanish cable group Ono. Consumer discretionary stocks slipped 2%,
dragged down by Japanese automakers such as Toyota and Honda.
U.S. GDP grew at an annualized rate of 2.6% in the fourth quarter, a significant decrease from the third
quarter’s 4.1% gain. The European economy grew at an annualized rate of 1.1% in the fourth quarter —
the third straight quarter of positive movement — boosted by increases in German exports and French
consumer spending. In Japan, fourth-quarter GDP growth slowed to an annualized 0.7% amid weakerthan-expected consumer spending and capital expenditures.
Portfolio review
The portfolio declined slightly and trailed the index. Stock selection within the financials sector detracted,
including the investment in Sumitomo Mitsui Financial. Shares of the Japanese bank fell after its fiscal
third-quarter profit declined amid lower bond-trading revenue. Insurer AIA slipped after reporting a drop in
its 2013 net profit due to volatile stock markets and Asian currencies. Barclays slid after posting a yearover-year decline in adjusted pre-tax profit in the fourth quarter. In contrast, Spain’s CaixaBank benefited
from optimism about the Spanish economy.
A greater-than-index stance and stock selection within the information technology sector also weighed on
returns, including the investment in Yandex, Russia’s largest Internet search firm. Yandex shares were hit
by disappointing fourth-quarter profit and concerns about the Russian economy. Yahoo Japan, which
operates Japan’s most-visited web portal, was hurt by investor skepticism of its plan to acquire eAccess.
On the other hand, Hamamatsu Photonics rose after hiking its forecast for first-half net income. In the
materials sector, nutrition and materials sciences firm DSM slid after issuing a cautious 2014 outlook,
while building materials firm Holcim advanced on expectations of improving cement shipments this year.
Meanwhile, in the industrials sector, aircraft parts maker Meggitt fell. Investments in energy hurt overall.
Ophir Energy slid after experiencing a dry well off the coast of Gabon.
The choice of consumer discretionary stocks boosted returns. Satellite operator SES gained after posting
a rise in operating profit in 2013. Strong sales lifted shares of U.K. hotel and coffee shop operator
Whitbread. On the flip side, Japanese auto parts maker Denso was hurt by a rising yen and worries about
the domestic economy, and home appliance maker Electrolux fell after a disappointing quarterly report.
Stock selection in consumer staples lifted results, particularly the investment in commodities trader Olam
International. The stock was buoyed by higher coffee prices and a takeover bid led by Temasek Holdings.
Several health care stocks also contributed. Drug makers Roche and Novo Nordisk rose after forecasting
higher full-year revenue and profits. The choice of telecommunication services stocks also helped relative
returns. Swisscom climbed after forecasting higher earnings for 2014, while Germany’s freenet also
advanced. However, shares of Japanese mobile carrier SoftBank fell amid investor doubts about its ability
to reverse losses at U.S. carrier Sprint, in which SoftBank took a controlling stake last year.
Outlook and strategy
In a moderately improving global economic environment, managers are seeking attractively valued, wellmanaged companies in industries experiencing growing consumer and business-to-business demand. In
the area of transportation, managers have focused on auto parts suppliers, which should be helped by
technological innovations to boost safety and fuel efficiency and improving auto sales in the U.S. and
emerging markets. The portfolio also is invested in aerospace systems and parts suppliers that should
benefit from the introduction of new airplane models and order backlogs. In the financials sector, the
strategy emphasizes commercial banks and insurers with significant exposure to growing Asian markets.
European banks with improving balance sheets and attractive valuations are another area of focus. In the
technology sector, managers have increased their exposure to software and other companies in the
areas of digital security, enterprise applications and cloud computing. The strategy has invested in
semiconductor and semiconductor equipment makers and component parts suppliers involved in the
production of new smartphones and tablets.
Although still somewhat uneven, the global economic picture has brightened over the last year. In
Europe, the economy has stabilized and appears to be growing modestly. However, consumer spending
and unemployment must improve if growth is to accelerate. The direction of the Japanese economy
remains uncertain. A sustained recovery there will depend on whether wages and exports can
meaningfully increase and whether consumer spending can recover from the recent sales tax hike.
Although several developing economies are struggling, the growth of the emerging markets consumer
should continue to create opportunities for companies in both developed and developing markets. 
The portfolio review is based on preliminary data for a representative account. All returns are in U.S. dollars unless otherwise noted. The
statements expressed herein are informed opinions, are as of the dates noted, and are subject to change at any time based on market or
other conditions. This publication is intended for client use only. It aims to highlight issues and is not intended to be comprehensive or to
provide advice. © 2014 The Capital Group Companies, Inc. All rights reserved.
Emerging Markets Equity
review and outlook — first quarter 2014
Market review
Emerging markets stocks ended the quarter flat amid concerns about military tensions between Russia
and Ukraine and political uncertainty in countries such as Venezuela and Thailand. Slowing economic
growth in China further eroded investor sentiment, along with fears about the health of the country’s
banking system as companies struggle with tighter access to financing. But markets such as India and
Indonesia rallied, lifted by hopes for reform and improving current account deficits. Consumer
discretionary and technology stocks led market gains. Commodity-related stocks fell.
A few emerging markets currencies depreciated against the U.S. dollar, prompting countries such as
Turkey and Russia to raise interest rates. The ruble declined more than 6% against the dollar. Meanwhile,
the Chinese renminbi — which has risen against the dollar in recent years — fell 3%. China’s central
bank widened the currency’s trading band to 2% as part of its broader initiative to adopt more marketfriendly policies.
The MSCI China IMI lost 5%, with banks falling sharply. Shares of property developers retreated as
housing price gains slowed and a string of corporate debt defaults dampened investor sentiment. In
March, Shanghai Chaori Solar Energy Science & Technology became the first company in China’s
onshore bond market to default, suggesting that the government has begun a broader process of
deleveraging and no longer intends to back companies with bad debt. Several other commodity-related
and real estate firms appeared to be at risk. Manufacturing in China, as measured by the HSBC
Purchasing Managers’ Index, fell to an eight-month low of 48.0 in March, down from 50.5 in December.
Several Asian markets rebounded. Indian stocks climbed more than 8% amid enthusiasm ahead of May
elections and rising anticipation of a victory for pro-reform candidate Narendra Modi and his Bharatiya
Janata Party. The country’s current account deficit narrowed, largely due to a decrease in gold imports.
The rupee advanced 4%. In Latin America, the MSCI Brazil IMI rose 2%. Shares of several banks that
have suffered in a slowing economy rebounded as profits improved due to a reduction in bad loans.
Russian stocks fell 15% as the conflict with Ukraine escalated and a rapid series of events rattled
markets, including the ouster of Ukrainian Prime Minister Viktor Yanukovych. Russia’s subsequent
annexation of Crimea triggered economic sanctions by the U.S. and Europe.
Portfolio review
The portfolio lost value, trailing the benchmark. Investments in Russia fell sharply, with concerns about
economic sanctions and a slowing domestic economy weighing on investor sentiment. Shares of
Sberbank fell more than 20%. Russia’s largest bank announced its 2013 profit was lower than expected
due to an increase in provisions for nonperforming loans. Shares of wireless provider Rostelecom also
posted double-digit declines, as did Internet firm Yandex, which indicated its revenues were likely to slow
from last year’s robust levels.
Investments in technology held back relative results, including the lack of exposure to Chinese Internet
firm Tencent. A few consumer discretionary investments also detracted from returns. Arcos Dorados,
which operates McDonald’s in Latin America, posted disappointing profits, weighed down by currency
losses in Brazil, Venezuela and Argentina. Shares of casino operator Wynn Macau retreated on the heels
of sharp gains last year.
A few investments in China weighed on results, including several property developers. Gas distributor
Beijing Enterprises and injection mold machine maker Haitian International also declined amid concerns
about decelerating economic growth. Investments in China Mengniu Dairy were a bright spot, however.
Mengniu’s shares climbed further as it continued to partner with developed-market firms seeking to
expand into China.
The fund’s exposure to several oil exploration and production companies helped results. Shares of
Australia’s Oil Search rose as it agreed to buy a 23% stake in the Elk and Antelope gas fields — the
biggest undeveloped fields in Papua New Guinea. Managers expect that the acquisition will allow Oil
Search to optimize its development of natural resources in Papua New Guinea and further establish its
role as a leading developer in the country. Stock selection in utilities also contributed to results,
particularly investments in Cemig. Shares of the Brazilian electricity provider rose on expectations that it
would benefit from subsidies as the government struggles to avoid outages in the face of severe drought.
Several investments in India lifted returns, with banks ICICI and HDFC posting double-digit gains.
Glenmark Pharmaceuticals climbed as it reported healthy sales of generic and specialty drugs.
Outlook and strategy
Recent market weakness has created opportunities to invest in some companies at more attractive
valuations. Challenges vary significantly by country and by company. Managers are finding value in wellrun small- and mid-cap companies with strong growth prospects, especially in an improving global
economy, as well as exporters that should benefit from currency depreciation. They are also interested in
firms committed to paying consistent dividends as an indication of their long-term growth potential.
In particular, managers have become more interested in commodities producers that have strengthened
their balance sheets. Investments in China and Hong Kong make up a significant portion of the portfolio.
Managers continue to prefer gas and waste treatment companies that stand to benefit from reforms that
promote cleaner energy. The fund also emphasizes Chinese property developers with solid longer-term
growth prospects even in a tighter credit environment as well as select consumer and health care firms.
Overall, managers continue to believe that China’s new government is taking a thoughtful, patient
approach to longer term structural changes that will support healthy growth in a more market-oriented
economy. With a number of emerging markets facing elections in the coming year, managers are
becoming more attracted to stocks that should reap the rewards of changing political priorities in countries
such as India, where there is likely to be an increased focus on infrastructure development. 
The portfolio review is based on preliminary data for a representative account. All returns are in U.S. dollars unless otherwise noted. The
statements expressed herein are informed opinions, are as of the dates noted, and are subject to change at any time based on market or
other conditions. This publication is intended for client use only. It aims to highlight issues and is not intended to be comprehensive or to
provide advice. © 2014 The Capital Group Companies, Inc. All rights reserved.