In May the fund gained 0.1%, with positive performance from Taiwan and China. Technology was the strongest sector led by Mediatek, the Taiwanese chipset designer that has a growing franchise in AI. This was offset by weakness in the UAE and Brazil which has been the weakest market so far this year.
Despite very high real interest rates the Brazilian economy has remained strong whilst the fiscal picture has deteriorated. This has put pressure on the currency and local bonds, as the easing cycle looks like it’s coming to an early abrupt halt. Political noise has also returned to Petrobras with a change of CEO, which is a relatively regular occurrence but nevertheless resulted in a negative market reaction.
Such changes have little impact on the high cash generation of the company and any changes to strategy take a very long time to materialise. This is ensured by the strength of the SOE law which underpins capital allocation decisions and the distribution of excess cash to shareholders every quarter. It continues to be a cash machine, but it’s a bumpy road.
We re-affirmed this view meeting with management last month, and was one of the many meetings we’ve had with companies from and all over the emerging world (June is peak season for visiting London).
The standout region has been the UAE where activity remains very strong. This market has an attractive mix of a dollar-linked economy, a solid dividend culture and good growth potential given supportive policies. One such example is a new position in an oil field services company that receives an attractive guaranteed return for its existing fleet whilst leaving optionality to expand into other services, new unconventional gas fields and other regional countries. We like this combination of having good visibility on dividends with compounding growth to deliver capital appreciation.
Where we have relatively little insight is with elections. At the end of the month, and within a week, we had results from Mexico, South Africa and India, all of which generated plenty of surprise and market volatility.
As expected, the governing parties in all remained in office, but in India and South Africa they lost their majorities. The Indian equity market was priced for perfection with highly optimistic expectations that Prime Minister Modi would receive a new strong mandate to implement much needed economic reforms. When the result showed the opposite, necessitating a reliance on uncertain coalition partners, the market dropped 7%. And yet in the following few days it rebounded back to new all-time highs as if nothing had happened, which is clearly not the case.
In Mexico the opposite occurred when the ruling party gained a super-majority. However, the market and currency also dropped dramatically, in this instance because it raised the possibility of Constitutional changes, a long-held ambition of the out-going president.
The South African election is however possibly the most interesting in that the ruling ANC has been forced into coalition government (or more palatably referred to as a ‘Government of National Unity’) with the opposition and some other smaller parties, but excluding the more radical extremists. This could be a meaningful turning-point for South Africa which has been in a state of managed decline for some time.
It’s too early to draw firm conclusions from these events, but thankfully it does at least mark the
finale for this year’s election calendar, at least for the emerging world.
