Denker SCI Emerging Markets FF - Dec 18
The quarter ended December 2018 saw no respite for investors, with emerging and developed markets down 7.8% and 13.7% respectively. The main contributors to this performance revolves largely over a Fed who continues to signal for more US interest rate increases, be it at a slower pace; continued political uncertainty around the world and ultimately, the realisation that the impact of a trade war between the United States and China, will not be limited to affecting China only.
The fund outperformed during this period as global investors started allocating funds to EM on the back of the solid outlook that EM corporate earnings remains strong and that the growth differential between EM and DM (specifically with the US) will start widening again.
Changes to the portfolio
Market volatility during the quarter, created opportunities for us to initiate a number of new positions; HDFC Bank, a leading private bank in India; and Shriram Transport Finance, the market leader in India in commercial vehicle funding. We also bought Jeronimo Martins, a leading Portuguese retailer with significant operations in Poland; and Swatch, the world’s largest watchmaker. We also added to the Fund’s holdings in Tencent as we believe current valuation is overly pessimistic regarding their gaming revenues; Yes Bank, a leading Indian bank; and AIA Group, a leading Asian life insurer whose share price was affected by the US-China trade tensions.
We sold our position in the Indian financial company, Axis Bank as the company’s share price approached our estimate of its intrinsic value. We also trimmed our holdings in the Brazilian bank Bradesco, the Brazilian retailer, Cia Hering and the Taiwanese semi company, MediaTek.
Brilliance China Automotive: Investors were spooked by the announced change to the BMW-Brilliance JV structure in 2022, with Brilliance’s stake being sold down from 50% to 25%. The company also announced earnings that were 24% down YoY, due to increased dealer compensation and the ramp up costs of the X3 SUV. While investors will sit back and watch, the company is still expected to produce 15% earnings growth for the year.
Despite the company demonstrating the power of its ecosystem on Singles’ Day (11.11), recording US$30.8bn in merchandise sales and handling 1bn packages through its logistics platform, investors sold down all Chinese companies indiscriminately during the quarter.
Matahari Department Stores:
Investors sold down the company on the back of it no longer forming part of the MSCI Indonesia index. The company has initiated a buyback program and will likely be e beneficiary to the Government’s increase in social spending budget leading up to the 2019 Presidential elections. We think the company is set to continue growing through the rollout of more stores at regional malls, expansion of its own brand products and as it gains traction with its e-commerce platform.
Brazil: With politics finally taking the backseat on the election of a new president, the fundamentals of many of our Brazilian company holdings started to be rewarded by the market and contributed to the fund’s outperformance in the quarter.
Matahari Department Stores: Since October, Indonesia has seen its macro environment improve as rate hikes finally brought stability to the weakening Rupiah. Rakyat, a leading Indonesian bank, reported strong loan growth despite a challenging quarter. In an environment of falling credit costs and management’s continued strategy to focus on the higher yielding retail loan market, growing fee income and improving efficiency through the use of technology, will see the company’s ROE improve and patient shareholders rewarded.
Outlook / a focus on quality
We believe the only way to deliver sustainable outperformance over the long term is to invest in areas which reflect value and are often shunned by the market, and we do this using a bottom-up approach. This approach leads us to invest in companies that can continue to grow despite the prevailing macro climate, which can also entail the returns of the portfolio significantly deviating from the benchmark.
Investors should expect the volatility of 2018 to continue in the context of ongoing USChina trade tensions, slowing US growth and global political volatility.
Amongst the turmoil we find long-term opportunities in EM equities for patient investors. Valuations are very attractive and we are seeing substantial upside in our portfolio of companies.
Predicting the catalyst that will turn the tide is an impossible thing to do, but history has shown that sentiment can turn very quickly.
The portfolio will apart from assets in liquid form, invest in participatory interests of the SIM Global Emerging Markets Fund established under the Sanlam Universal Fund PLC approved by the Irish Regulator in June 2015. The Denker SCI Emerging Markets Feeder Fund will have foreign exposure of at least 85% at all times. Subject to the investment restrictions, the underlying portfolio will primarily invest in equity securities (including equity linked securities such as common stock and preference shares) of companies traded in or dealt on the stock exchanges or regulated markets as defined in the prospectus of the Sanlam Universal Fund plc. The underlying portfolio may, where the Manager considers it in the best interests of the portfolio, invest up to 100% of its net assets in securities traded in or dealt on the stock exchanges or regulated markets considered by the manager to be emerging and frontier markets. The portfolio may also invest in financial instruments for the exclusive purpose of hedging against exchange rate risk.
The Trustee shall ensure that the investment policy set out in the preceding clauses are adhered to; provided that nothing contained in this clause shall preclude the Manager from varying the proportions of securities in terms of changing economic factors or market conditions or from retaining cash in the portfolio and/or placing cash on deposit.
For the purpose of this portfolio, the manager shall reserve the right to close the portfolio to new investors on a date determined by the Manager. This will be done in order to be able to manage the portfolio in accordance with its mandate. The Manager may, once a portfolio has been closed, open that portfolio again to new investors on a date determined by the Manager.