Commentary
Following a strong start to the year, February saw the gains evaporate. A ‘stronger for longer’ US economy led to negative comments on US monetary policy and a bounce in the US dollar. Chinese equities were weaker on investor expectations for the re-opening trade, increased regulatory concerns ahead of the Party Congress, and more heated exchanges between US and China. The upside potential for the portfolio is a little over 55% as measured by the weighted average of the company price targets in the portfolio.
The bottom performers by contribution in the month were LG H&H, Thai Beverage, and Samsung Electronics. LG H&H (Korean cosmetics manufacturer) is seeing evidence of a bounce back in Chinese consumer spending on cosmetics. As travel recovers the spend in duty-free shops should increase to pre-Covid levels over time. Cosmetics is a competitive market, but it is too early in the bounce back to judge winners and losers, and all players should benefit. Thai Beverage (leading Thai alcoholic beverage producer) continues to see solid growth in beer and spirits related to on-premise trade, and a pull-back in home consumption of spirits that benefitted in the Covid years. Cost pressures have been alleviated with price increases. The company has a strong franchise in Thailand with around 90% market share in spirits and a duopoly position in beer. It trades at 14 times earnings, which is approximately half the valuation of Asian peers. Samsung Electronics (Korean electronics manufacturer) is progressing through a tough semiconductor down-cycle currently, but industry wide curbs on capital expenditure should feed through to reduce the inventory of semiconductors, allowing a new up-cycle by year-end with Samsung in a strong strategic position.
The top performers by contribution in the month were Ternium, Femsa, and ASE Technology. Ternium (Latin American steel producer) is benefitting from a bounce back in US steel prices, but also from the ‘near shoring’ of manufacturing to Mexico. It is a low-cost producer of steel and a beneficiary of Mexican growth and through steel import substitution. Femsa (Mexican consumer products & beverages) outlined its strategic corporate plans to improve shareholder value. It is selling non-core assets to focus on its growth assets (retail, beverage, and digital) and return excess proceeds to shareholders. The most notable point is the sale of its Heineken stake. This is a good start to simplifying and communicating the corporate strategy. ASE Technology (Taiwanese semiconductor testing & packaging provider) reported results during the month accompanied by guidance which, although reflecting an expected slowdown in utilisation rates affecting near-term margins, were stronger than expected into the second half of the year. Semiconductor packaging has become an integral part of the continuous performance enhancement of systems of integrated chips. This trend remains encouraging with strong new demand sources from the auto- and Industrial sectors. A market share nearly double that of its nearest competitor positions it well from a cost and advanced technology perspective. The high dividend pay-out ratio translates to a dividend yield near 7%, further supporting an attractive stock valuation.
Bolsa Mexicana is a new position in the month. Bolsa Mexicana operates a stock exchange in Mexico. Over the past decade, the firm has generated consistent growth against an otherwise volatile backdrop; its net cash position, consistently high margin, and the moat-like characteristics of a central exchange model making it highly resilient. Mexican listed equity, debt and derivative markets remain heavily underdeveloped, even by emerging market standards, and off a low base we expect continued growth, directly benefitting Bolsa. It is currently trading at a 6% dividend yield, and dividends should continue to rise in the future, supported
Commentary
Following a strong start to the year, February saw the gains evaporate. A ‘stronger for longer’ US economy led to negative comments on US monetary policy and a bounce in the US dollar. Chinese equities were weaker on investor expectations for the re-opening trade, increased regulatory concerns ahead of the Party Congress, and more heated exchanges between US and China. The upside potential for the portfolio is a little over 55% as measured by the weighted average of the company price targets in the portfolio.
The bottom performers by contribution in the month were LG H&H, Thai Beverage, and Samsung Electronics. LG H&H (Korean cosmetics manufacturer) is seeing evidence of a bounce back in Chinese consumer spending on cosmetics. As travel recovers the spend in duty-free shops should increase to pre-Covid levels over time. Cosmetics is a competitive market, but it is too early in the bounce back to judge winners and losers, and all players should benefit. Thai Beverage (leading Thai alcoholic beverage producer) continues to see solid growth in beer and spirits related to on-premise trade, and a pull-back in home consumption of spirits that benefitted in the Covid years. Cost pressures have been alleviated with price increases. The company has a strong franchise in Thailand with around 90% market share in spirits and a duopoly position in beer. It trades at 14 times earnings, which is approximately half the valuation of Asian peers. Samsung Electronics (Korean electronics manufacturer) is progressing through a tough semiconductor down-cycle currently, but industry wide curbs on capital expenditure should feed through to reduce the inventory of semiconductors, allowing a new up-cycle by year-end with Samsung in a strong strategic position.
The top performers by contribution in the month were Ternium, Femsa, and ASE Technology. Ternium (Latin American steel producer) is benefitting from a bounce back in US steel prices, but also from the ‘near shoring’ of manufacturing to Mexico. It is a low-cost producer of steel and a beneficiary of Mexican growth and through steel import substitution. Femsa (Mexican consumer products & beverages) outlined its strategic corporate plans to improve shareholder value. It is selling non-core assets to focus on its growth assets (retail, beverage, and digital) and return excess proceeds to shareholders. The most notable point is the sale of its Heineken stake. This is a good start to simplifying and communicating the corporate strategy. ASE Technology (Taiwanese semiconductor testing & packaging provider) reported results during the month accompanied by guidance which, although reflecting an expected slowdown in utilisation rates affecting near-term margins, were stronger than expected into the second half of the year. Semiconductor packaging has become an integral part of the continuous performance enhancement of systems of integrated chips. This trend remains encouraging with strong new demand sources from the auto- and Industrial sectors. A market share nearly double that of its nearest competitor positions it well from a cost and advanced technology perspective. The high dividend pay-out ratio translates to a dividend yield near 7%, further supporting an attractive stock valuation.
Bolsa Mexicana is a new position in the month. Bolsa Mexicana operates a stock exchange in Mexico. Over the past decade, the firm has generated consistent growth against an otherwise volatile backdrop; its net cash position, consistently high margin, and the moat-like characteristics of a central exchange model making it highly resilient. Mexican listed equity, debt and derivative markets remain heavily underdeveloped, even by emerging market standards, and off a low base we expect continued growth, directly benefitting Bolsa. It is currently trading at a 6% dividend yield, and dividends should continue to rise in the future, supported
Commentary
by both top-line growth and further margin expansion. Shareholders also benefit from an ongoing stock repurchase and cancellation program which is a consistent feature of Bolsa’s shareholder return policy. The current valuation level for Bolsa is attractive both relative to the exchange’s history and against peers.
Russian holdings
Please note that on 3rd March 2022 the Fund’s investment in Lukoil ADR listed on the London Stock Exchange (LSE) was suspended from trading. Our Valuation Committee considered it was in the Fund’s best interests that the holding of Lukoil ADR be fair value priced (FVP) at zero. In June 2022, we elected for the holding to be converted into local shares (Lukoil PJSC).
Given the current international sanctions on Russian securities and cash balances, we believe that if lifted and the Fund was able to access the local market, the holding in Lukoil PJSC (with a current FVP of zero) would represent 4% of the Fund and cash dividend of 1%. We continue to monitor the situation closely.
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