During February, the fund outperformed the MSCI Emerging Markets index by 1.7%.
The largest contribution to relative performance came from our value stocks in Korea, followed by strong performance in Taiwan and the UAE. For once, the Chinese market staged a rally and our portfolio slightly lagged this move. Our underweight position in India was also a small relative drag against the index.
During the month we were active taking profits in some strong performers where upside to fair value was more limited and added to new ideas in Korea, Greece and Mexico.
While we spend much time discussing the major markets such as China, Korea or Brazil, it is worth remembering that smaller economies can offer overlooked opportunity – often at very attractive prices. An example of this is Greece – a former basket case of an economy crippled by high debt and inefficiency. The Athens stock exchange has delivered almost double the returns of the S&P500 over the past three years, driven by the re-birth of its banking sector. The latest milestone is the sale of the entire government holding in Piraeus Bank driven by strong market demand for the stock. The Greek government also pays a lower interest rate on its 10 year bonds today than the US.
During the Eurozone banking crisis in the early part of the previous decade, Greek banks found themselves largely wiped out. As the economy contracted by 25% between 2008 and 2016, it became accepted practice that borrowers simply did not need to repay their loans. Banks were given little recourse and prevented from enforcing mortgage loans. Instead, the sector was quasi-nationalized and various creative mechanisms were instituted to keep the banks theoretically solvent. Typically, these involved the creation of accounting “assets” to offset the gaping holes left by writing down bad loans. These bad loans were gradually sold off by tranches, allowing the balance sheets to evolve back towards normality.
The silver lining of all this was a highly deleveraged economy – household debt to GDP fell from 80% in 2012 to 45% in 2023. This meant the Greek banks saw improving asset quality on their balance sheets – not only were bad loans being disposed of, but new lending was to increasingly creditworthy borrowers. Aided by cost-cutting measures and some normalization in interest rates, banks generated fresh capital and rely less on accounting tricks to show solvency. They have been able to resume cautious growth into a now underbanked market while resuming dividend payments. We have owned a Greek bank for over two years and have recently even added another one given the continuing attractive valuations and increasing normalization.
Greece has completed a full EM cycle of debt fuelled growth and bust, like Thailand, Korea, Malaysia, Turkey and many others before it. It is a cautionary tale for investors chasing growth but also a reminder of the opportunities arising when things look most bleak.
