In July the fund returned +3.1%.
The strongest performance this month came from Kaspi in Kazakhstan and Emaar Development in the UAE, both have reported very strong second quarter earnings with increased guidance for the full year. The weaker end of the portfolio came mainly from Chinese holdings such as Sinopec, which has traded lower after a strong Q1, and China Yongda where car sales remain weak.
In terms of portfolio adjustments, we felt it prudent to trim Kaspi given the size it had become in the portfolio. We exited two small positions in Thailand in part to make room for a renewable electricity generator in Romania. Hidroelectrica yields 11% trades on 8x earnings and has net cash on the balance sheet equivalent to 10% of the market cap, all of which makes it very defensive.
In Brazil we added to Petrobras following the announcement of the much-anticipated revised dividend policy. As opposed to paying out 60% of free cash flow (after capex), the company will now pay shareholders 45% in quarterly payments. Capex will increase but not particularly significantly. This means the company will be yielding between 12-20% depending on the oil price, which is roughly half the level from last year but still significantly above peers and the 10-year risk-free rate of just over 10%.
Last year this position was in our ‘special situations’ silo but it has now become a core liquid holding. Our alignment of interests also appears to be converging with the government who now seem happy to receive the dividends and bolster the budget.
On that theme, we’re grateful to Fitch this month for illustrating some of the diverging economic trends we’ve been discussing for a while.
Within a week of downgrading the United States’s sovereign debt, citing the high and growing government debt burden, an increasing deficit, and the erosion of governance relative to peers, they upgraded Brazil on the back of ‘better-than-expected macroeconomic and fiscal performance’ and an optimistic outlook for further proactive policies and reforms.
We wouldn’t be quite so sanguine, but the juxtaposition of trajectory is clear. Brazil still has many issues but overarching them has been a Central Bank that has firmly stuck to orthodox monetary policy. This allowed them to cut rates last month by 50bp, concluding the tightening cycle first launched in March 2021. Chile also reversed rates with a similarly higher-than-expected cut of 100bp marking Latin America as the ‘first-in-first-out’ region of the global rates cycle.
The only other country of note cutting rates this year has been China which didn’t have a tightening cycle in the first place. The data continues to deteriorate with deflation now the buzzword following CPI and PPI at -0.4% and -4.4% respectively.
Further evidence of the ‘hollowing-out’ of the Chinese economy came from FDI data that showed it at its lowest level since 1998 which on a net basis has turned negative. The exposure we have continues to be focused on strong and well aligned SOEs and the consumer.
In the real-estate sector there’s been a slew of micro-policy initiatives (estimated to be 320 nationwide) but no large-scale ‘bazooka’, which has disappointed the market. In part this reflects the increased focus on domestic consumer consumption where we expect increasingly direct measures.
According to the CEO of one of our holdings in the retail sector, certain regions have sought to stimulate demand by directly crediting individual WeChat accounts, which have largely replaced the use of cash. Indeed, it’s quite possible that later this year, whilst the developed world is still pursuing ‘QT’, China could be conducting broader nationwide ‘QE’ style policies directed specifically at the consumer.