THE YEAR SO far has truly been unprecedented. After the Covid-19-induced bear market in March, markets shrugged off their fears in April. Aggressive fiscal and monetary support packages were announced by a number of countries around the globe. Despite widespread cuts to growth forecasts and rising job losses, equity markets had a good second quarter (Q2-20).
The Global Frontiers Strategy returned 5.3% during the period, while the MSCI Frontier Markets Index was up 14.8%. Having sold off by less than the index in Q1-20, the Strategy’s recovery in Q2-20 was more muted. Year to date, the Strategy is down 15.4% versus the index, which is down 15.8%. As a reminder, the Strategy performance numbers include the write-down of the in-country Zimbabwe (currently 34 basis points [bps] of the Strategy) and Nigerian assets (157bps of the Strategy), as currency challenges persist in both markets. The index continues to use the official exchange rates.
The Q2-20 performance of the major markets across the universe was largely positive, with Argentina (+45.2%), Vietnam (+26.8%) and Slovenia (+18.8%) the top-three performing markets. The laggards were Bangladesh (-0.4%), which suspended trading for a period and implemented price floors, Oman (+2.0%), and Kenya (+3.0%).
THE LAND OF THE BLUE DRAGON
The Covid-19 pandemic has provided a harsh test for all nations and their governments’ abilities to handle a crisis. Some have handled themselves with aplomb, carefully going about the necessary steps and adaptations needed to adjust to life this year. Others have seen their dysfunctional governance placed front and centre, with factionalism, cronyism, divisive politics and the simple inability to get things done, sadly dominating. Looking across the Global Frontiers investment universe, there are many examples of countries that fall in either of these two camps. However, the country that has by far scored the highest on this tragic Covid-19 ‘test’ is Vietnam.
Despite being a country of 100 million people, sharing a border with China and extensive trade links with the rest of the world (including 250 flights per day with China and South Korea), Vietnam has only recorded 355 cases and zero deaths (Johns Hopkins data, 6 July 2020). This is a truly remarkable achievement and bears testament to the technocratic ability of the Vietnamese government. Vietnam’s success can be attributed to a number of factors, a few of which are listed below:
- Rapid response: schools were shut the day after the first case was confirmed in late January. The country then entered three weeks of strict social distancing.
- Extensive testing: testing focused on hot-spot areas and saw everyone tested, not just those showing symptoms.
- A widespread information campaign: the first 30 seconds of every phone call was a message from Vietnam’s Ministry of Health, and a website was set up that shared the details of everyone who was infected and their contacts.
- A responsible population: the Vietnamese have a high sense of trust in their government, resulting in good adherence to the social distancing and mask-wearing requirements. Experience with the SARS virus in the early 2000s meant that the general population understood the seriousness of Covid-19 very early on and acted accordingly.
Today, Vietnam is largely back to business as usual. After a slowdown in economic growth to 1.8% in the first half of 2020, the economy is bouncing back quickly. The country’s reliance on tourism and exports sees it remain exposed to the challenges being experienced in other parts of the world, but for the domestic economy, life is largely back to normal.
We increased our Vietnam weighting from a low of 6.5% at the end of March to 19.2% at quarter-end. Vietnam has always been a country that we would have liked to own more of in the Strategy, with arguably the best macroeconomic outlook in our investment universe and some exceptional listed businesses. Foreign ownership limits, valuation and corporate governance concerns have meant that we have never owned as much of Vietnam as we would have liked. This has changed, with Vietnam now our single largest country exposure. The increase was primarily driven by improving valuations. The March correction in the stock market presented us with some very attractive buying opportunities, as we believed that the economic impact on the individual companies that we analysed was likely to be less than the correction in share prices.
During the quarter, we sold the bulk of our gold position (589bps) as equities looked more attractive following the March sell-down. We trimmed some of our exposure in Eastern Tobacco (161bps) as we participated in the share buyback announced by the company. Eastern remains a core holding and is the third-largest position in the Strategy. We also exited our Hemas Holdings position (145bps) on concerns around the operating environment and on news that the dynamic CEO was retiring.
The largest contributors over the quarter were Vietnam Enterprise Investment Fund (+199bps), Zimplats (+107bps) and VNV Global (+102bps), while the largest detractors were QNB Al Ahli (-72bps), Al Eqbal Tobacco (-68bps) and British American Tobacco Kenya (-55bps).
THE TEACHING VALUE
The handling of the Covid-19 pandemic thus far has provided valuable new information about how well individual country governments function. During the quarter, we incorporated this information into our extensive valuation framework. This has seen the country market multiples adjusted slightly for some markets. In the case of Vietnam, its market multiple increased. This results in a lower discount rate in our modelling, and a willing-ness to pay a higher price earnings multiple than before. It is important to note that the handling of the Covid-19 pandemic is just one of a number of quantitative and qualitative factors we look at when assessing individual country multiples. As the John Maynard Keynes quote goes, “When the facts change, I change my mind – what do you do, sir?”
The individual businesses in the portfolio continue to trade on incredibly attractive valuations. They are largely resilient to the impact of Covid-19 and while earnings will be impacted in 2020, the long-term outlook is incredibly promising. The pandemic has given us the opportunity to significantly increase our exposure to a number of high-quality businesses in Vietnam that we are incredibly excited about. Thank you for your continued support, particularly during these volatile times. +