Denker SCI Emerging Markets FF - Sep 18
The quarter ended September 2018 has continued to be a difficult one for emerging markets, with developed markets outperforming by a strong 6.1%. This was largely driven by concerns over rising US interest rates, a stronger dollar, emerging market (EM) country specific political volatility and, ultimately, concerns about the impact of the trade war between the US and China.
Despite macro uncertainty, the outlook for corporate earnings remains strong with aggregate profits projected to grow by double-digits in 2019.
Changes to the portfolio
During the quarter, we took advantage of the volatility created by the market to initiate positions in Odontoprev (a leading Brazilian dental insurance business), Estacio (one of the top education company’s in Brazil) and Yes Bank (a prominent private bank in India). We added to the fund’s holdings in Matahari Department Stores, as we believe it has an attractive valuation; Vipshop, whose increased traffic from Tencent and JD.com are likely to be seen in Q4 2018; and Brilliance China Auto, on the back of much confusion created by the change to the Chinese JV rules with foreign car manufacturers.
We sold our positions in Credicorp and China Mobile - we believe that the rollout of 5G and pricing pressure on subscriber data packages will reduce the profitability of the company. We trimmed our holdings in MediaTek, Sberbank and TBC.
China: While the markets were scared by the first $50 billion of tariffs imposed by the US, the imposition of a further $200 billion interestingly saw the markets calm as it brought certainty with the ability of the market to calculate the effects. China was the biggest detractor of performance.
Indonesia: Contagion fears caused by the self-caused economic problems in Argentina and Turkey saw investors sell down EM countries that have bigger current account deficits.
Turkey: A number of policy missteps scared investors into making a hasty sprint for the exit. The country has experienced a rapidly weakening currency and fast increasing inflation rate. The Turkish central bank stepped in and delivered a rate hike of 6.25%, above the market consensus, quelling some of the markets fears. There are many good companies in Turkey and valuations are compelling, but policy uncertainty requires continued care.
Vipshop: Investors continued to sell down the company in the uncertain climate of the trade war and their impatience of not seeing a drastic increase in the monthly active users from the Tencent and JD.com partnership. The company has been clear that they are in the testing phase of new user experience and expect positive contributions only to be seen from Q4 onwards. We are confident that our investors will be rewarded for the patience of holding this company.
Matahari Department Stores: Investors sold down companies considered to be at risk of a consumer slowdown. Despite its positioning in the retail market, 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.
Garanti Bank: We have had the opportunity to discuss the bank’s funding with management, who are confident that they have sufficient funding to weather the current Turkish storm and come out of it stronger.
Brazil: Despite headlines being largely dominated by politics, Kroton, the biggest private tertiary company in Brazil, was the biggest company contributor to performance.
Kasikornbank: Thailand has seen its macro environment improve significantly. Kasikornbank, a leading Thai bank, is well positioned towards the SME market (a segment getting government attention to help them grow and transform on the tech front). It has a solid liability franchise and has been a disciplined operator around its cost structure.
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 continued volatility in EM as US rates rise, China trade tensions escalate, and political volatility continues. 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.