In a disappointing start to the year the fund declined by 1.4%. Once again China led the downside despite further measures to support both the property and the equity market with direct exchange purchases. Taiwan also took a breather with profit-taking in some of our holdings that had a very strong December.
On the positive side Mexico, Greece, Brazil and the UAE all made similar gains. Financials were the best sector as the ‘higher for longer’ expansion in net interest margins continues to generate strong earnings and increased dividend distributions. Reflecting this were Banco del Bajio in Mexico and Caixa Seguridade in Brazil which were the best performing stocks over the month.
In position moves, we tidied-up some of the smaller holdings by taking advantage of the squeeze in shipping rates to exit Vapores in Chile. We also exited Hidroelectrica in Romania having reached fair value and given the deteriorating outlook for electricity prices. More significantly we exited Citic Telecom which has been a top 5 holding since launch. The company was disappointingly late to announce complications in the negotiations for the Macau license renewal, which accounts for 65% of Ebitda.
The positions we added are mainly in financials with Dubai Islamic Bank, Bolsa Mexicana and Halyk Bank in Kazakhstan, given an improving domestic economic outlook and political reforms. It has a very attractive valuation and double-digit yield.
The most interesting policy development this month has come from South Korea, a market that has some of the lowest earnings and price/book multiples outside of China. The reason for this Korean discount is a clear lack of capital allocation discipline and weak alignment with minorities. Chaebol family businesses often have complex crossholdings to keep total control, balance sheets are often inefficient and combined this can lead to some ‘surprising’ use of treasury shares.
In what’s become a significant pre-election initiative, the “Value-Up” program initiated by the incumbent President is expected to encourage Korean corporates, through both regulation and tax incentives, to resolve many of these discounting factors. Rumoured reforms include tax breaks for cancelling treasury holdings, lower withholding tax on dividends and reforms to resolve punitive inheritance taxes which are linked to the complex ownership structures.
The motivation for this stems from a well-known frustration that the country is still considered an ‘emerging market’, despite having GDP/capita the same as Italy. More poignant however is pension funding given the aging demographic, an issue we’ve written about on a number of occasions. The National Pension Service owns around 10% of the market and is likely to face a deficit. By forcing companies to pay dividends and restructure, the government can potentially bridge this gap and catalyse a re-valuation of the market.
We’ve previously cited this alignment of interests with local savings institutions as one of the more significant investment rationales for the fund. It’s encouraging that it seems like we’re all singing from the same hymn sheet.
