In November the fund appreciated by 1.6%, led again by the UAE which was almost all due to the performance of Emaar Development following another significant beat in quarterly earnings.
This also meant real estate was the best performing sector followed by Communications which was dominated by a strong performance from our two Korean telcos and led to a positive country return, bucking the negative trend of the underlying market.
The Korean market has in fact been one of the worst performing markets this year. This wasn’t helped in the first few days of December by one of the more extraordinary political events of the year when out of the blue, President Yoon declared martial law. In a baffling but brief sequence of events, the Korean Parliamentary institutions held sway, overturning his declaration and Yoon is now likely to be impeached early next year.
Following the failure of the ruling party to win control over the legislature back in April, the opposition already controlled Parliament so he was essentially a lame-duck president, and his removal will only have a modest impact on policy. All parties agree on pushing companies towards better governance but there will now be less of a sense of urgency. Unfortunately Korean politics has a fairly messy history, besides Yoon all Korean presidents this century have ended up in jail which is a record only matched by Peru.
Whilst Chinese data still indicates weak domestic spending there are signs that the real estate market is bottoming out, at least in Hong Kong and tier one Chinese cities. Over recent weeks it was notable that the dominant Hong Kong realtor was obliged to give a positive profit warning, whilst across the border two large SOE developers paid a record price of $2.5bil for 263,000 sqm of land in the Shenzhen business zone.
However the bond market continues to indicate weakness with the whole curve heading lower, the 10 year rate is now below the psychologically important 2% and the 1 year rate below 1% (all of which is supportive for quality SOE high yielding equities), but indicating even lower policy rates and further stimulus. In that regard it does also appear that the balance of power between President Xi and the labyrinth of economic policy committees is shifting more towards the committees. In a Chinese context this is positive as the worst-case scenarios in EM tend to occur when a dominant president or dictator thinks they know best, when in reality they’re clueless.
The two front-runners in this context are currently Turkey and Brazil, although they are at different ends of the cycle. Turkey (and Argentina) are in a self-help phase, correcting previous indiscretions, whilst in Brazil the opposite is true. Fiscal spending is still too high given the strong domestic economy and higher than desired inflation. The concern is that with a weakening currency it will further escalate imported inflation, thus requiring even higher policy rates, which have again been raised to 12.25% whilst the 10 year bonds yield 14.5%. Debt to gdp is therefore creeping higher to 78% but thankfully very little is in foreign currency.
We are continuing to reduce Brazilian exposure in any company that is not dollar-linked given the prohibitively high cost of capital, and the broader macro risks as we go into their summer holiday season. Petrobras however continues to look attractive given the 14% yield (paid quarterly) which compares favourably with Brazil 10 year US dollar debt which currently yields 6.8%.
