Over the month the fund declined by 1.1%. The distressing events in the Middle East, along with the continued rise in US bond rates were the dominant factors over the month.
In a regional context Dubai is often considered a ‘safe haven’ but unsurprisingly it was where we saw the greatest contagion. We started the month with it accounting for around 8% of our portfolio making it our fifth largest country exposure but our second best in terms of returns year to date(+300bp) and as such we had been reducing some positions, such as Air Arabia following strong performance.
In situations such as these when there’s a significant exogenous shock, it’s important to keep a sense of perspective and differentiate between contagion that genuinely impacts earnings, and price action that’s a knee-jerk reaction to risk aversion. We therefore used the price weakness to add to Salik which operates the toll road system and is a highly cash generative business. We did not sell any Emaar Development, given the yield and valuation. We did however sell EM Power, the district cooling utility, which was fully valued and dipped only briefly, as well as Fertiglobe which has significant operations in Egypt. Thankfully the crisis appears to be abating and our positions recouped most of the initial losses by the end of the month.
At the other end of the spectrum we made solid gains from the result of the Polish election. The incumbent party, which has had an adversarial relationship with the EU, won the most seats but lost to a coalition that were able to form a majority. Whilst we tend to view elections as more of a risk than an opportunity, in this instance the economic impact was either neutral to positive. Poland has a highly profitable banking sector which is at cyclically low valuation whilst household debt to GDP has fallen to 25% (vs 56% in Eurozone and 65% in the US). With inflation coming down, full employment and the resumption of EU stability funds more likely, we are positive on the outlook for Poland.
Taiwan continued to deliver solid returns with notable performance from MediaTek on signs of stronger Chinese demand for mobile phones, as well as new AI related products. Technology was once again the best performing sector followed by financials, which was led by Pekao SA (which we added to in the previous month) and was also the strongest single stock return.
We are now reaching the end of the third quarter (or first half) earnings season, and in general it’s been quite positive. The most notable result came from Emaar Development where our stoicism was rewarded with a third quarter net profit that was more than double the consensus estimate, increasing by 190% year-on-year. The top line also beat estimates by 41% and monthly sales continue to be strong into Q4. The company has a free cashflow yield of over 30% and at the current price reflects only the value of contracted sales, attributing zero value to any new sales from the landbank which is good for well over a decade. Whilst we wait for this to revalue we are clipping an 8% yield in a dollar-pegged currency with no withholding tax.
In Korea we added to SK Telekom on signs that the competitive environment has begun to ease whilst they’re also achieving a solid lead in the adoption and application of AI technology. We are consolidating our South Korean holdings into high conviction positions and so will exit KT, which is our other holding in the sector.
In China we made our first sale in Citic Telecom since launch to bring it back to our 3% position soft limit and to make room for a new position in China Education. Two other positions we added over the month were the Chilean food retailer SMU, and Warsaw Stock Exchange. This is a small cap company but yields 7%, has some very interesting new products derived from internally developed technology that will drive growth whilst, also being the most undervalued stock exchange in our universe.
