The fund rose 3.4% during the month compared to MSCI FMxGCC Net TR (SEK) which rose 1% and MSCI EM Net TR (SEK) which rose 4.5%. More than half of the excess return came from Egypt (21% of the fund’s assets), where the fund’s sub-portfolio rose slightly more than 10%. The second largest contribution came from the absence of Argentine holdings (27% of the index). Argentina fell more than 2% during the month. The third largest contribution came from Bangladesh (11% of the fund) where our stock selection worked well during April.
The fund’s holding in BRAC Bank (4% of the fund) rose 15% on the anticipated announcement that Ant Financial (subsidiary of Ali Baba Group) would buy nearly 20% of BRAC Bank’s subsidiary, bKash, from external shareholders (Money in Motion and The Bill & Melinda Gates Foundation). bKash is the largest mobile payment company in the frontier market space in terms of number of users with over 30 million registered users. The valuation is unknown but rumours circulating in the markets suggest a valuation of USD 1bn, which, if true, means that the value of BRAC Bank’s shares in bKash now represent about half the market capitalisation of the bank. In Egypt GB Auto (5% of the Fund) rose 23% partially on the fact that a bill designed to benefit local car manufacturers will soon be finalised, as well as the company’s evaluation of a potential spin-off of its highly profitable leasing business. Juhayna Foods, Egypt’s largest dairy producer, rose more than 26% on positive results, indicating that the company has put the worst behind it. Finally Elswedy, the leading subcontractor of equipment for the power industry, rose 22% on increasing interest from foreign investors. The fund added three new holdings during the month. The National Bank of Pakistan was added to the portfolio. The bank has been punished a little too much due to increased pension provisions, which means that the valuation of its equity is currently at record low levels compared to other Pakistani banks. For 2019, the bank is valued at just under 5x annual gain and P/BV at 0.6x – about half of the sector’s average. The banking sector is expected to benefit from higher interest rates going forward which means the entry point looks interesting to us. We also bought Sri Lanka’s leading insurance company Ceylinco valued at around 5x annual profits making it very cheap in a frontier context. The company is well placed to continue to grow its bottom line by above 10% per year going forward. Insurance premiums (general and life) as a percentage of GDP in Sri Lanka are approximately 1.5% compared to about 5% for Asia as a whole and 8-9% in developed markets. Finally, we added AGP Pharma, a Pakistani pharmaceutical company, a fast-growing new player and recent entrant to the stock market through IPO. With a USD 300m market capitalisation it is still small and will be out of international indices for several years but if our analysis of the company is correct it has the potential to become a leading player in Pakistan’s pharmaceutical market, which remains underdeveloped. According to the World Health Organisation (WHO), total healthcare spending as a share of GDP in Pakistan (2015) is 2.7% compared to about 5% in other Asian countries (excluding Japan and South Korea) and about 10% in OECD countries.
MSCI FMxGCC Net TR (SEK) rose 1% during the month, compared to MSCI EM Net TR (SEK) which rose 4.5%. Bangladesh and Nigeria were the winners this month rising 8% and 9% respectively. The losers were Vietnam, which fell 5%, Argentina -3%, and Kenya -2%.
In Vietnam, we finally saw sharp correction as local investors took profits going into the long weekend. Foreigners sold a marginal USD 30m during the last week in April but remained net purchasers during the month with USD 66m. This excludes Singapore Wealth Fund’s (GIC) investment in Vinhomes totalling USD 850m (USD 1.3bn including debt instruments). As flagged in previous monthly letters, some of the largest index names in Vietnam ran a little bit too far a little too fast and we view the correction as healthy. From a frontier market perspective, Vietnam’s breakthrough in the past twelve months is unique given the broad range of both strategic investors and portfolio investors that have entered the market. We interpret this as most investors in emerging markets gradually placing the country in the same category as the Philippines, Thailand and Indonesia. In comparison to these countries Vietnam’s valuation of 19x annual profits is not exuberantly high. For active investors, we anticipate some very interesting opportunities in the names beyond the 30 largest companies where valuations are significantly lower. We believe that the expansion in the blue chips that has taken place during the last 6 months is over and from now on the market will develop more in line with profit growth. With an expected profit growth of 18-20% for 2018 and potential double-digit growth for 2019, from a frontier market perspective, Vietnam’s prospects are interesting even more so in comparison with other Asian emerging markets.
Two new companies were added to the fund in April 2018. The first addition was AGP Limited, a newly-listed pharmaceutical company from Pakistan. With commercial operations that began in Karachi, AGP has been manufacturing, marketing and selling pharmaceutical and healthcare products in the domestic and international markets since 1989. Sri Lanka’s Ceylinco Insurance PLC was the second addition. Ceylinco primarily underwrites general and life insurance products. The company also has several subsidiaries in the education, power – generation and distribution of hydro power to the national grid – and financial sectors. For its CSR, the company runs social impact projects such as providing scholarships to disadvantaged children, blood donation drives and supporting relief measures like it did during the 2017 floods. Founded in 1939, Ceylinco is headquartered in Colombo. Avanceon Ltd, an IT company from Pakistan, was divested during this month due to financial considerations.
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