The fund rose 2.1% in July, compared to the fund’s benchmark index MSCI FMxGCC Net TR (SEK), which rose 3.5%. The fund’s underperformance was primarily due to the lack of holdings in Morocco (1.2%), underweight in Vietnam (1%), the fund’s overweight in Egypt (0.7%), the lack of holdings in Romania (0.6%), and the fund’s overweight in Pakistan (0.5%). The fund received positive contributions primarily from Sri Lanka (2.5%) where the sub-portfolio rose almost 20% during the month on increased optimism that the outcome for the tourism industry may not be as bad as previously feared and hopes for political change post elections. It is worth noting that the equity market is now higher than before the terrorist attacks during Easter. However, Sri Lanka is still trading close to the 10-year low on P/B. As said in previous monthly letters, we believe the most important trigger for the stock market will be the elections, the December presidential election and the parliamentary elections expected in the first half of 2020. The fund also received positive contributions from its position in Turkey (0.4%) as well as from stock selection in Nigeria (0.3%).
In July, the fund added a new holding in Vietnam: Airports Corporation of Vietnam. The company operates 22 airports around Vietnam, with a total passenger volume of around 95 million people annually. The company is currently undergoing an expansion that is expected to take the number of travelers to around 140m in 2021 and subsequently 200m in 2025. What we particularly like, however, is the potential for the development of existing facilities. Those who have visited Ho Chi Minh City know that the duty-free shops and the food courts leave some things to be desired. At present, the company receives around 20% of its revenues from non-aeronautical fees (shopping, food, etc), while the average among other airport companies is around 50%. The valuation is on the higher side (P/E 30x for expected profit in 2019) but given the unusually certain growth prospects, it is reasonable and leaves further upside. Currently, the market capitalization of USD 7.5bn makes the company one of the largest in Vietnam. However, the company’s current listing on Upcom means that they are not included in any indices. A future listing on the HCMC stock exchange is likely to make the company a core holding in larger institutional investors’ portfolios.
MSCI FMxGCC Net TR (SEK) rose 3.5% during the month, compared to MSCI FM Net TR (SEK), which rose 5.7% and MSCI EM Net TR (SEK), which rose 1.9%. The best market during the period was Sri Lanka, where we noted some optimism as the country is gradually starting to think about elections later this year. The last five years have been politically stagnant with a parliament that has had a hard time agreeing and making decisions. Local investors hope that the presidential election in December followed by parliamentary elections in the first half of 2020 will result in an improved decision-making capability most likely led by former President Rajapaksa’s party SLPP.
Nigeria had another tough month where investors have gotten tired of President Buhari’s inability to appoint a new government, five months after the presidential election. On July 22, the nominations came and we are now awaiting approval. Although we hope to have a new government in place soon, Buhari’s seemingly passive leadership has meant most foreign investors have already given up. The very low valuations of Nigerian banks are unlikely to normalize until we see some initiatives on economic reforms. The very high dividend yields (10-15%) mean that it is still reasonable to expect an acceptable long term return even if the ongoing circumstances remain. The other day we published an article on LinkedIn regarding Pakistan where we stated that we believe that current levels are now far too pessimistic: https://www.linkedin.com/pulse/pakistan-now-when-mattias-martinsson/. We are very positive to the reforms currently being implemented, especially the work done to document a larger part of the economy and bring in more taxpayers. We also believe that Pakistan, under Imran Khan´s guidance, has a good chance to improve foreign investors’ perception, which would open up the country to a wider group of investors. We see some indications of this already as foreign investors this year are net buyers in the stock market for the first time since 2014. This is set against a background where the stock market is trading at a ten-year low in terms of Price to book value. As we write in the article the timing for a market turnaround is always very difficult and unexpected events might impact in the short term.
As we write in the article the timing for a market turnaround is always very difficult and unexpected events might impact in the short term. In the first days of August, just a few days after we posted the article, we had exactly such an event. India surprisingly decided the Indian parts of Kashmir would lose its current autonomy. This will be perceived as a strong provocation by Pakistan and possibly it is an answer to Trump’s offer to mediate in the Kashmir conflict. We do not expect the situation to lead to a military conflict but even if it remains just a war of words it might short term cause concerns in the market.
One new company was added to the fund in July 2019. Airports Corporation of Vietnam (ACV) is a Vietnam-based company that is involved in the airport operation sector. With a head office in Ho Chi Minh City, the company manages 22 airports nationally, of which 7 are international. The company reports on its energy-saving solutions and tracks consumption for each airport. In 2018, the ACV reportedly recycled between 10-15% of its total water usage. The company’s policies comply with the labour code and employees go through regular training programs. They also engage in a variety of CSR activities which include organising blood donation drives, building community houses and donating for natural disaster relief as well as providing scholarships for poor students.
No companies were divested from the fund in July.
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