In December the fund declined by 2.75% leaving the return for the full year since launch in June at -0.3% adjusted for dividend distributions. On January the 3rd the fund went ex-dividend for the fourth quarter payment of £0.166, a yield of 1.7%, bringing the total distribution since inception in June to £0.634, which annualises to a double digit yield after local withholding taxes.
This has been achieved through our stock-specific process, focused on premiums to the cost of capital and applied via a geographically diversified portfolio allocation regime. Over this first six months of the fund we’ve looked to establish a baseload of strong yielding and compounding companies, with a select few ‘special situations’ where we see potential for price significant appreciation and capital return.
This has been reflected in the return attribution for this initial period where our best performing stocks were Petrobras, Fibra Macquarie and Thungela, which drove our country performance league table led by Mexico followed by Brazil and Greece. At the sector level our best performance came from energy followed by real estate. Our most significant detractors came from South Korea, Taiwan and materials at the sector level.
The markets in December saw a continuation of recent themes. In Brazil the political picture remains noisy and volatile but inconclusive as appointments to key posts continue and policies take shape. We continue to be cautiously optimistic that the worst-case scenario is more than adequately reflected in the valuation of Petrobras. We even have sympathy for some of the proposals being discussed by the likely new CEO which may eventually be viewed positively, particularly in the context of sustainability. Through a process of profit-taking and dividend payments what was our largest position is now a middle-ranked exposure which we’re more than happy to hold. Our only other positions in Brazil are two utility companies.
The dominant headlines however continue to come from China where re-opening policies have gathered momentum, despite reports of significant Covid infections and deaths. One rumoured governmental report estimated around 250 million people, or 18% of the population had been infected in the first 20 days of December with the rate still accelerating.
So far, the official stance has been to simply stop reporting these numbers. As we shift from zero-Covid to max-immunity, there are indications in early January that infections have already peaked in certain areas of the north, but further south the trajectory remains negative. Boarders are reopening for the start of “Chunyun”, the first period of Lunar New Year travel, and families that have been separated for years are clearly taking the opportunity to re-unite, despite the risks.
It seems this sea-change in policy direction is now unlikely to reverse from infections alone. We’ve already seen further measures to support the real estate market ranging from relaxation of the ‘three-red-lines’ policy, support for mortgages as well as liquidity and capital for developers. We now expect further policies in the energy sector focusing on improving efficiency, grid modernisation and transition to renewables.
We could also see more direct measures aimed at the consumer supporting consumption, as part of the broader goal of rebalancing the economy away from export-led growth.
Being the last country globally to see a post-covid re-opening, we’ve seen how markets react. The most obvious is in travel and entertainment which are typically one-off boosts and can be short lived. We already have exposure to this through names such as Squire Pacific and Citic Telecom, our focus for new inclusions is more on those areas with longer duration. We remain cautious on the real-estate sector but are more positive on broader mobility and energy provision areas where valuations are attractive and are likely to see further policy tailwinds.
Whilst the broader global picture remains challenging, and there’s still significant geo-political pressure, certain top-down metrics are now looking more positive. For example, the Chinese credit impulse has now turned positive, as has excess liquidity (M1 – nominal GDP growth), whilst Chinese dividend yields are now in-line with corporate bond yields which have tightened rapidly.
These should also provide positive contagion in certain global commodities and other emerging markets particularly in the region. We’ve already seen moves in regional currencies such as the Korean Won, which we felt was significantly undervalued, as well as Thai Baht and stability returning to Taiwan Dollar. More broadly however it’s the valuation shadow China has cast on the rest of the emerging market asset class which will hopefully now start to dissipate.
Looking at the forward p/e ratio of global emerging markets excluding China relative to MSCI AC World, we are at the cheapest level we’ve seen since 2007. From a yield perspective the EM dividend yield now stands more than 1.5 standard deviations higher than developed markets, and significantly higher than the previous peak last seen in 2006, whilst price to book valuations are at similar lows. As value investors, this provides a highly supportive backdrop as we start 2023.
