In June the fund rose by 1% bringing the year-to-date return to 9.8%. The second quarter dividend was £0.322536 which returned a net 12-month dividend yield of 7.2%, a spread of 530bp over UK inflation. Performance was led by South Korea and Taiwan but offset by weakness in Mexico and Brazil. This was also reflected at the stock level with Hyundai Motor and MediaTek providing the highest returns, whilst Fibra Macquarie and Banco del Bajio the weakest.
Whilst the momentum in AI has continued, it’s been a relatively chaotic few weeks in emerging markets caused mainly by macro factors. Various elections have been the main culprit, but there’s also been shifts in sentiment on the Chinese market and reduced hopes for monetary easing given the US inflation outlook.
Much of this has been reflected in heightened currency volatility, particularly in crowded ‘carry trades’ such as the Mexican Peso and Brazilian Real. The Mexican market corrected sharply on the back of proposed constitutional changes, but with a balanced team announced for the incoming administration it’s now recovered much of the weakness.
For the next few months, in both these countries, the political agenda is likely to continue to overshadow the market. We’ve therefore shifted some of our exposure towards dollar exporting businesses and taken advantage of the recent weakness in Petrobras and Petroreconcavo, which currently has a 20% free cashflow yield on a net cash balance sheet, giving significant upside potential for dividends.
By contrast, the outcome of the South African election has been about as positive as one could reasonably hope for. The ‘Government of National Unity’ has been sworn-in and whilst it’s early days, for the first time in a very long time, we can be cautiously optimistic.
Added to this power-outages (known as “load-shedding”) which have been a significant drag on the economy for some time, ceased back in April and it looks like it’s structural shift. As with other key services in South Africa the private sector has provided the solution, in this case it’s solar power. Both households and businesses and have reduced demand on the grid by installing significant solar capacity, with more to come over coming years.
This is a significant game-changer as not only will operating costs decline, but combined with a more balanced political backdrop, energy reliability re-opens the door to investments that have been stalled for a decade. We’ve added two new positions in financials and we expect to add more in due course.
Similar to Brazil, South African risk-free rates are significantly wider than both policy rates and inflation. With the scope for a more positive feedback loop following the election this risk premium is likely to ease, putting upward pressure on the currency and our positions.
When politics are aligned with both monetary policy and investors, it tends to provide fertile ground for profitable investments. It’s interesting to note that the EMEA region is now probably the most comprehensively aligned in this regard. But the trajectory is also positive in some of the smaller ASEAN markets where we are likely to increase in exposure in coming months.
