Commentary
At the headline level, there have been several events influencing activity in Emerging Markets during the quarter. These include the conflict in Israel and its effect on Red Sea trading routes, plus a transformative election in Argentina. For further information on these events and their impact on the fund, please refer to the NewsInFocus updates on the Oldfield Partners website. COP28 also enjoyed plenty of attention during the quarter, but beyond a handful of interesting insights, outcomes were largely more bark than bite.
The portfolio returned 17.3% over the quarter. This is compared to a return of 13.1% for its benchmark, the MSCI EM Index. Within this, there have been many moving parts. Emerging markets may all share similar opportunities and risks that drive their long-term development path, but equally have very different paths to get there.
At the holding level, top contributors to performance were Embraer, Buenaventura and ASE. Detractors were Thai Beverage, Hapvida, and Indofood.
Embraer was the single greatest contributor. The company is an aircraft development and manufacturing firm, based in Brazil but largely selling into global markets – namely the US. The firm had hit a severe valuation discount due to the scuppering of an expected deal with Boeing and downturn in demand due to Covid. In 2023 however, Embraer has demonstrated that these were transitionary setbacks. The valuation remains compelling, especially if compared to global peers, and as such it remains a key holding within the fund. Beyond the core business on which our valuation is based, the firm also has a majority holding in EVE. EVE is a US listed entity developing electric powered aircraft for short passenger flights – the actual aircraft looks much like a large drone. While EVE is not profitable, and will likely not be for some time, it is a leading player in a market that is forecast to be large. This is evidenced by the firms already substantive and growing international orderbook. As the technology and regulatory hurdles are met, the value of EVE will be added to the Embraer base valuation.
Buenaventura - a Peruvian gold, silver and copper miner - also contributed positively to the funds return. The firm has been trading a significant discount to similar companies globally, despite its good operating assets, including a holding in the Cerro Verde mine. The catalyst for the strong performance was an investment in the firm by Antofagasta, a big industry name (London listed). Antofagasta trades at nearly double the valuation of Buenaventura, and as such it should be value accretive for Antofagasta shareholders. The move is positive for Buenaventura, not least as it raises awareness to the extent that Buenaventura is undervalued, there is also however an operational benefit that comes from having the backing of the industry heavyweight.
ASE contributed to positive performance over the quarter. Established by the Chang brothers and running for almost four decades, the firm is the global leader in semiconductor packaging and testing. The company operates namely out of Taiwan, but primarily selling to a US end market. The company should enjoy long-term structural growth as chip demand rises, however the industry is prone to volatility – one step back, two steps forward. Both the share price and valuation reflect this dynamic, and the current run of good performance is post a period of weakness across 2022. We remain comfortable that the firm is attractively valued given its fundamentals.
The detractors in 2023 were led by Thai Beverage. Operating out of Thailand, but also selling in Vietnam and Myanmar, the firm has a number of leading alcoholic beverage brands, including the beer brand Chang. The challenges for the firm have been twofold. Foremost, has been the high input prices putting downward pressure on margins – a phenomena that has been evident across alcohol names globally. The secondary headwind has been soft consumer demand in Thailand, and a weak Vietnam. While Vietnam enjoys excellent long-term structural growth prospects, the economy has proven to be volatile. This is largely a consequence of big swings in the domestic property market. The latest cycle was prompted by a crackdown on corruption, creating an uncertainty that has spread into the real economy, effecting confidence. This affects Thai Beverage, as the firm has a majority holding in Sabeco, owner of Saigon Beer, a leading beer brand in Vietnam, and sales have suffered due to the soft macro. Both these factors we consider transitional, and we remain confident in the valuation case for Thai Beverage.
Brazilian healthcare service provider Hapvida also detracted from performance. A new position in 2023, it has been one of the strongest performers since its initiation into the portfolio. Third quarter performance has however tailed off due namely to a change in CFO – undesirable, but the former CFO is moving to a board position and therefore not an overall significant concern. Results for the firm continue to be encouraging, and we expect further progress as it recovers, led by an upcycle in pricing and controlled costs. The valuation in our view remains very attractive at this point.
Indofood was also weak over the quarter. The firm is an Indonesia based food product company, namely selling noodles, but also with a dairy product division. The company has generated consistent top-line sales growth over time, but due to varying input costs, the bottom-line can be volatile in any given year. The recent share price weakness is largely down to some weakness in 3Q23 results – a margin drop for the noodles business due to higher than expected OPEX. We do not see this as a long-term headwind however, and the valuation remains both compelling relative to its history and peers.
Portfolio changes
No positions were entered or exited during the fourth quarter.
Outlook
We remain confident that at a holdings level there remains considerable overlooked value across the portfolio. Over the past decade, emerging markets have performed severely behind developed markets, and this has bifurcated valuations, creating compelling opportunities for bottom-up investors.
In terms of ‘what could go wrong’, at the company level, each holding has its own idiosyncratic risks, although these risks vary in form and degree. At the ‘macro’ level, key areas that we continue to monitor include the extent that China policy makers maintain control of rebalancing the economy; the possibility of new conflict arising or spreading; and the changing demand outlook for developed markets. The elections in the US will also likely play a significant role effecting overall market confidence. The world may be becoming increasingly multipolar, but the US is still the single largest cog when it comes to global economic activity.
Beyond the high-level figures, there is a complex melting pot of opportunity and risk. It is an exciting time to be an active value investor, and importantly, based on our valuation analysis there remains a high level of upside to the fund’s positions. A good starting point to enter the year. We however remain long-term patient investors, and as such shy away from grand annual predictions. What we can however note is that 2024 will no doubt have its share of surprises, and valuations are at a level that has been historically indicative of strong positive subsequent returns.
Commentary
At the headline level, there have been several events influencing activity in Emerging Markets during the quarter. These include the conflict in Israel and its effect on Red Sea trading routes, plus a transformative election in Argentina. For further information on these events and their impact on the fund, please refer to the NewsInFocus updates on the Oldfield Partners website. COP28 also enjoyed plenty of attention during the quarter, but beyond a handful of interesting insights, outcomes were largely more bark than bite.
The portfolio returned 17.3% over the quarter. This is compared to a return of 13.1% for its benchmark, the MSCI EM Index. Within this, there have been many moving parts. Emerging markets may all share similar opportunities and risks that drive their long-term development path, but equally have very different paths to get there.
At the holding level, top contributors to performance were Embraer, Buenaventura and ASE. Detractors were Thai Beverage, Hapvida, and Indofood.
Embraer was the single greatest contributor. The company is an aircraft development and manufacturing firm, based in Brazil but largely selling into global markets – namely the US. The firm had hit a severe valuation discount due to the scuppering of an expected deal with Boeing and downturn in demand due to Covid. In 2023 however, Embraer has demonstrated that these were transitionary setbacks. The valuation remains compelling, especially if compared to global peers, and as such it remains a key holding within the fund. Beyond the core business on which our valuation is based, the firm also has a majority holding in EVE. EVE is a US listed entity developing electric powered aircraft for short passenger flights – the actual aircraft looks much like a large drone. While EVE is not profitable, and will likely not be for some time, it is a leading player in a market that is forecast to be large. This is evidenced by the firms already substantive and growing international orderbook. As the technology and regulatory hurdles are met, the value of EVE will be added to the Embraer base valuation.
Buenaventura - a Peruvian gold, silver and copper miner - also contributed positively to the funds return. The firm has been trading a significant discount to similar companies globally, despite its good operating assets, including a holding in the Cerro Verde mine. The catalyst for the strong performance was an investment in the firm by Antofagasta, a big industry name (London listed). Antofagasta trades at nearly double the valuation of Buenaventura, and as such it should be value accretive for Antofagasta shareholders. The move is positive for Buenaventura, not least as it raises awareness to the extent that Buenaventura is undervalued, there is also however an operational benefit that comes from having the backing of the industry heavyweight.
ASE contributed to positive performance over the quarter. Established by the Chang brothers and running for almost four decades, the firm is the global leader in semiconductor packaging and testing. The company operates namely out of Taiwan, but primarily selling to a US end market. The company should enjoy long-term structural growth as chip demand rises, however the industry is prone to volatility – one step back, two steps forward. Both the share price and valuation reflect this dynamic, and the current run of good performance is post a period of weakness across 2022. We remain comfortable that the firm is attractively valued given its fundamentals.
The detractors in 2023 were led by Thai Beverage. Operating out of Thailand, but also selling in Vietnam and Myanmar, the firm has a number of leading alcoholic beverage brands, including the beer brand Chang. The challenges for the firm have been twofold. Foremost, has been the high input prices putting downward pressure on margins – a phenomena that has been evident across alcohol names globally. The secondary headwind has been soft consumer demand in Thailand, and a weak Vietnam. While Vietnam enjoys excellent long-term structural growth prospects, the economy has proven to be volatile. This is largely a consequence of big swings in the domestic property market. The latest cycle was prompted by a crackdown on corruption, creating an uncertainty that has spread into the real economy, effecting confidence. This affects Thai Beverage, as the firm has a majority holding in Sabeco, owner of Saigon Beer, a leading beer brand in Vietnam, and sales have suffered due to the soft macro. Both these factors we consider transitional, and we remain confident in the valuation case for Thai Beverage.
Brazilian healthcare service provider Hapvida also detracted from performance. A new position in 2023, it has been one of the strongest performers since its initiation into the portfolio. Third quarter performance has however tailed off due namely to a change in CFO – undesirable, but the former CFO is moving to a board position and therefore not an overall significant concern. Results for the firm continue to be encouraging, and we expect further progress as it recovers, led by an upcycle in pricing and controlled costs. The valuation in our view remains very attractive at this point.
Indofood was also weak over the quarter. The firm is an Indonesia based food product company, namely selling noodles, but also with a dairy product division. The company has generated consistent top-line sales growth over time, but due to varying input costs, the bottom-line can be volatile in any given year. The recent share price weakness is largely down to some weakness in 3Q23 results – a margin drop for the noodles business due to higher than expected OPEX. We do not see this as a long-term headwind however, and the valuation remains both compelling relative to its history and peers.
Portfolio changes
No positions were entered or exited during the fourth quarter.
Outlook
We remain confident that at a holdings level there remains considerable overlooked value across the portfolio. Over the past decade, emerging markets have performed severely behind developed markets, and this has bifurcated valuations, creating compelling opportunities for bottom-up investors.
In terms of ‘what could go wrong’, at the company level, each holding has its own idiosyncratic risks, although these risks vary in form and degree. At the ‘macro’ level, key areas that we continue to monitor include the extent that China policy makers maintain control of rebalancing the economy; the possibility of new conflict arising or spreading; and the changing demand outlook for developed markets. The elections in the US will also likely play a significant role effecting overall market confidence. The world may be becoming increasingly multipolar, but the US is still the single largest cog when it comes to global economic activity.
Beyond the high-level figures, there is a complex melting pot of opportunity and risk. It is an exciting time to be an active value investor, and importantly, based on our valuation analysis there remains a high level of upside to the fund’s positions. A good starting point to enter the year. We however remain long-term patient investors, and as such shy away from grand annual predictions. What we can however note is that 2024 will no doubt have its share of surprises, and valuations are at a level that has been historically indicative of strong positive subsequent returns.
Commentary
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Commentary