The Fund rose 2.6% in May, compared to MSCI FMxGCC Net TR (SEK) which rose 4.2% and MSCI EM Net TR (SEK) which fell 2.8%. Worth noting was that the US dollar weakened by almost 4% during the month, which lowered the corresponding return in Swedish krona. We lost relative performance primarily in Egypt (-1.2%) where the sub-portfolio fell close to 13%. We also lost relative performance in Pakistan (-0.8%) where the sub-portfolio fell about 3%. Furthermore, the lack of holdings in Romania contributed to a relative underperformance of 0.8% as the market was one of the strongest during the month, with an increase of just over 10%. An unexpectedly positive contribution came from Sri Lanka, where the sub-portfolio rose 8% in an otherwise falling market. We also received a positive contribution from Vietnam (+0.6%), primarily because of favourable stock selection. The lack of holdings in Lebanon and Kenya also contributed positively as both markets performed weakly during the month. We did some remodelling in May. We cleared out the remainder of our holdings in Hatton National Bank of Sri Lanka where the size was too small and conviction to increase was not strong enough.
During the month we invested in two new countries, Morocco and Indonesia. Indonesia with 267m inhabitants and GDP/capita of USD 3,900 fits thematically well into the rest of the portfolio. It is a market that we have followed for many years but where we have found it difficult to find good enough value. However, like most other smaller emerging markets, the stock market has a number of tough years behind it and the valuations are now around 10-years lowest measured as P/BV. We have made our first investment in Media Nusantara (MNCN). We have been following the company for a long time, and after the share price fell close to 50% in 2020, we decided to take an initial position. The company is the leading media company in Indonesia. Their revenues today are dominated by advertising revenue from their four TV channels (free to air channels, i.e. like Swedish TV4) which have a daily viewership of 90-120m people. What really caught our interest, however, is their efforts to expand their digital content. The company runs the largest local production company, producing everything from Indonesian Idol to a large number of local TV soaps. They have a library of 300,000 hours of content and produce 23,000 new hours annually. In recent years, the company has invested considerable resources in its digital channels, where the existing content can be reused in the company’s own YouTube channels but also in the company’s media portal “Okezone”, which is the 26th most popular website in the world today. Furthermore, the company runs its own talent agency where all participants in the company’s various talent shows (Idol, Indonesia’s got talent, Master Chef Indonesia, etc) are contracted for 5 years with an option for extension for another 5 years. The contracts include revenue sharing on advertising revenue the artists generate on various social channels such as Instagram, TikTok, etc., in addition to the artists being available for participation in the company’s other programs. Today, traditional advertising is 90% and digital advertising is 10%. MNCN’s goal is however for revenue streams to be equal within a five-year period. We believe in the company’s strategy. They have a very strong market position with a 35-45% viewership market share in traditional TV. Only 30% of Indonesia’s population currently lives in the cities. The remaining part of the population is distributed among almost 10,000 islands where access to cheap internet is limited. Thus, traditional advertising will remain important for a long time to come. However, through its digital investments, the company will in the long term be able to convert its traditional viewing group to the digital platforms. We like the fact that management seems to fully understand the opportunities that lie in increased digital exposure, not only to support its current position but as a tool to expand it. Their large media library, the annual new production, and their “stable” of artists also provide unique and steady access to locally customized content that can be reused over and over again. The major investments have already been made and we see good opportunities for higher profitability as digital revenues increase. The market’s valuation of around 7x this year’s expected profit seems very low for a well-positioned media company, willing to adapt to changing consumer behaviour, in the world’s fourth-largest country. We also believe that the company’s operations are decently insulated by the COVID-19 crisis in 2020. Some large segments of the advertising market, such as FMCG (fast-moving consumer goods), have reduced their advertising spending, while other large segments such as pharmaceuticals have increased theirs. In addition, the quarantine has of course meant a general increase in both television viewing and time spent on the internet.
Our second investment was made in Morocco, through the tech company HPS. HPS is one of the world’s leading electronic payment value chain suppliers, offering a suite of solutions e.g. mobile wallets, fraud detection, and e-commerce support. The company is active in over 90 countries and has more than 400 clients (including several top 100 financial institutions). We have followed the company for some time and had a meeting with the management in January. We have been impressed by the growth they have delivered (sales FY14-19 CAGR +25%, Net profit FY14-19CAGR +31%) as well as the prospects ahead. The industry growth is expected to be above 15% in the coming years and even higher growth is expected in Asia and Africa where HPS has more than 65% of their revenue. While PowerCard (the product suite name) or HPS is not recognized by end consumers, HPS has a strong reputation in the payment industry offering smarter and better integration with already existing systems, or by replacing them in full. As an example, one of their projects with Amex resulted in reducing the number of systems from 16 to 1 to handle all international payment flows, a huge productivity gain. We like the sector and we like the company due to its proven ability to provide smarter solutions to an industry in transformation as well as fast growth. As a subcontractor to the fintech players, the company does not get the same attention as those companies, but lessons learned from technological leaps in other industries are that it is often the companies that “sell the shovels to the gold diggers” who makes the most money. The market capitalization of USD 300m and the valuation (P/E 32x) would probably have looked different with a listing in a more well-known stock exchange than Casablanca. In addition, we would probably define it as one of only a few in our portfolio that is a clear acquisition candidate. In the same way, as for our newly acquired Indonesian company Media Nusantara, we see a relatively modest impact on the company’s operations during the COVID-19 crisis as demand for digital payment solutions has remained firm.
MSCI FMxGCC Net TR (SEK) rose 4.2% during the month, compared to MSCI FM Net TR (SEK) which rose 1.9% and MSCI EM Net TR (SEK) which fell 2.8%. The US dollar continued to weaken against the Swedish krona, which negatively impacted the return in SEK by just under 4% during the month. Since the peak on the 20th of March, the US dollar has lost just under 10% against the Swedish krona and around 5% against the euro. Among individual markets, Nigeria (+11%) and Vietnam (+10%) stood out on the positive side. For the FMxGCC index, it is worth noting that Vietnam and Nigeria accounted for almost the entire increase in SEK during the month. Other markets mainly held their ground after the strong bounce upwards in April. As we see things on the ground, we estimate that April was the bottom month during the COVID-19 crisis, while May has meant a gradual normalization with markets gradually opening up. It is a relatively unison picture, where indicative data from Google mobility data seems to match relatively well with what we hear from companies we talk to. The strength of the recovery has varied, however. In Vietnam, activity has been back to almost normal levels since early May, while other markets still have a decent gap to close. Colombo Stock Exchange (Sri Lanka) began trading again on the 11th of May after nearly one and a half months of closure. However, the expected initial fall in prices on the first trading day was followed somewhat unexpectedly by a recovery, led by local investors who picked up most of the flows from foreign sellers. This is an interesting phenomenon that we have seen in several markets in recent months. Lower bond yields in the wake of COVID-19 have meant that equities have become relatively more attractive to local investors. Foreign investors and their flows are perhaps the most popular topic of discussion among local equity investors. However, one should not forget that local investors themselves normally make up 60-90% of trading and should in the long term be viewed as a more important driver for price movements. After more than five years of almost exclusively outflows from foreign investors from smaller emerging markets, it is of course relevant to ask how long their potential selling can remain the most important topic of discussion. In the short term, the focus will be on the strength of the recovery post COVID-19 as our countries are now all gradually returning to normal and, of course, also concerns that the spread of infection and the burden on health care systems will again increase and what kind of reaction that would trigger. Political decisions are always unpredictable. However, based on experience so far, we see it as more likely with selective measures in the event of a second wave, rather than a new attempt to isolate everyone.
A potentially very important event, for emerging markets as a whole, is the presidential election in the US later this year. The normally so certain re-election of an incumbent president has become more uncertain post COVID-19 and the recent riots have probably not improved the situation. Expectations of victory for Joe Biden could be a more long-term positive signal for emerging markets as it would be seen as a step away from the anti-globalization of recent years. This would lead to expectations that the capital that flowed out of emerging markets during Trump, both in the form of lower direct investment and flows into the capital market, could gradually begin to reverse. In the investment committees for major foreign institutions, we believe a democratic victory could be the long-term trigger for increased allocation outside the US and Europe many have been waiting for. Recall we now have 10 years of underperformance for Emerging Markets vs Developed Markets. There is some relative performance to catch up on, but low relative valuations have not been enough, yet. An event worth watching.
Two companies were added to the Fund in May.
Hightech Payments Systems (HPS) is a software company based in Morocco, established in 1995. The company designs and provides payment technology for mainly finance, telecom, and distribution sectors. The company aligns its sustainability activities with a social responsibility charter established by the Confederation of Moroccan Enterprises (CGEM). The CGEM’s charter outlines nine commitments which are in line with recommendations from the UN, the ILO, and the OECD, and are also compliant with ISO 26000 guidelines. Through its foundation, HPS invests in local schools and universities to elevate the state of public education as well as coding workshops and nation-wide campaigns that bring together key players in information and communication technology.
Media Nusantara Citra (MNC) is an Indonesian company in the broadcasting and cable TV industry. The company was founded in 2001 and operates free-to-air television channels as well as radio, print and online media, talent management, and production house. MNC has a foundation that oversees the group’s sustainability and CSR activities. These activities revolve around assisting the government with infrastructure development, as well as contributing to the education, health, and other needs of the vulnerable sections of society.
One Sri Lankan company, Hatton National Bank was divested from the Fund due to financial considerations.
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