Lisa Haakman is an analyst with 18 years of investment industry experience.


THE PORTFOLIO DELIVERED a positive return in what was a challenging quarter, mainly due to weak domestic equity markets. The portfolio has per­formed well since inception and against its peer group over all meaningful time periods.

Tensions place equities under pressure

Against the backdrop of a slowing global economy, an escalating trade war and a revival of central bank stimulus measures, the MSCI All Country World Index ended the quarter flat in US dollar terms. Geopolitical risk in the Middle East, with escalating US-Iran tensions and a missile strike on a Saudi oil refinery – which is respon­sible for almost 5% of world oil supply – added to equity market volatility during the quarter. Emerging markets continued their recent under­performance, declining 4.3% for the quarter (with returns now negative 2.0% over a rolling 12 months) relative to developed markets which were marginally positive for the quarter (+1.8% over a rolling 12 months).

Notwithstanding this, the portfolio’s exposure to emerging market equities performed excep­tionally well on the back of some excellent stock picking and our overweight exposure has, in fact, contributed meaningfully to performance over the past year. We continue to maintain a relatively large exposure to global equities and believe that our emerging market equity exposure, in particu­lar, still offers compelling value.

Quantitative easing abounds once more

The FTSE World Government Bond Index appre­ciated by just under 1% in US dollars for the quarter. In September, the European Central Bank announced its biggest package of rate cuts and economic stimulus in three years as President Mario Draghi warned governments that they needed to act quickly to revive flagging euro­zone growth. The stimulus included cutting inter­est rates further into negative territory, reviving its contentious €2.6 trillion programme of buying bonds for an unlimited period and easing lending terms for eurozone banks.

Soon thereafter, the US Federal Reserve Board also cut rates by a further 25 basis points (bps), although the accompanying commentary was more hawkish than the market was expecting. Negative interest rates have led to significant distortions in asset markets. Currently roughly $15 trillion of global debt trade at negative yields, meaning you are likely to lose money if you hold these instruments to maturity. Furthermore, in Denmark – where banks have been grappling with negative interest rates longer than in any other country – they are now offering home mortgages at nega­tive interest rates (the bank is effectively paying the borrower to take money off their hands, so they pay back less than they have been loaned). The extent to which central banks continue to distort debt markets is concerning and we remain cautious on the outlook for global bonds.

Local economy weighs on sentiment

Recent economic data served to reinforce how dire the underlying domestic economic situation really is. This has flowed through to corporate earnings and we have been bombarded with company profit warnings over the past quarter. Investor and consumer sentiment continue to remain very weak and government urgently needs to deliver on much-needed structural reform to restore consumer and corporate confidence and kickstart the economy.

During September, the South African Reserve Bank (SARB) held the policy rate unchanged at 6.5%, but the SARB’s statement was more dovish than in July when it did actually cut rates. Although the SARB’s view is that monetary policy is not the solution to South Africa’s poor growth outlook, we believe that given the weak domes­tic economy, contained inflation and favourable global rate expectations, the SARB has room to cut rates further. Against this challenging eco­nomic backdrop, the rand weakened by almost 7% against the US dollar. The portfolio was well positioned for this move.

With local bond yields ticking up, the All Bond Index returned only 0.7% for the quarter. However, over the past year bonds have performed strongly and are up 11.4% over the rolling 12 months. Given the attractive real yields, local bonds continue to offer reasonable value and our current bond weighting is the highest it has been for a number of years. Property stocks have been battered by the weak economy, which is playing itself out through increasing vacancy levels, large rental reversions and reduced rental escalations. Much of the sector will struggle to show any distribution growth over the medium term. Our property hold­ings are concentrated in the A property shares, which we believe offer very attractive risk-ad­justed returns and we have a small position in some of the higher-quality property stocks, whose earnings should prove to be more defensive than those of their peers.

Overall, the JSE experienced a disappoint­ing quarter, with the JSE Capped Shareholder Weighted All Share Index declining 5.1% (and with it dragging down rolling 12-month period returns to -2.4%). The weakness was broad-based, but the financial and resource sectors fared the worst – both down over 6% for the quarter.

The industrial sector was down only 2.5%, with the large rand hedge stocks such as Naspers (flat), British American Tobacco (+14%), Anheuser-Busch InBev (+16%) and Bidcorp (+6%) holding up well. Notwithstanding the challenging market returns, our equity holdings performed well on a relative basis. We believe that our equity holdings are cur­rently offering compelling value and have used the weakness during the quarter to add to our position. It should, however, be noted that our domestic equity holdings continue to be skewed towards the global stocks that just happen to be listed on the JSE. Although many domestic-facing businesses are starting to screen as extremely cheap, given the deteriorating macro environment, there is a high probability many of them turn out to be value traps.

On the resources front, our large exposure to the platinum-group metals (PGM) sector contributed meaningfully to portfolio performance during the quarter. Northam Platinum and Impala Platinum (Implats) were up 40% and 37% respectively. Deficits in PGMs have seen the 3E (platinum, palladium and rhodium) basket price continue to rise. Despite their strong run, we still view the PGM stocks as very attractive. Northam Platinum and Implats currently trade on between six and eight times our assessment of normal earnings and still offer material upside to our fair values.

The Sasol share price has collapsed over the past 12 months (down 54%) as further cost overruns relating to the Lake Charles Chemicals Project (LCCP) emerged and management had to announce a delay in the reporting of the compa­ny’s full-year results to further investigate a breach of internal controls. Our underweight position in Sasol over this time has added to performance. We believe that the results delay is a consequence of control weaknesses identified around the LCCP budgeting process and not centred around the financial statements themselves. Although further cost overruns are unlikely, our biggest remaining concern is that the budgeted profitability for LCCP disappoints on the back of ramp-up issues or pressure on commodity prices.

Nevertheless, we expect the company to now shift to a phase of debt reduction and improved free cash flow generation. Sasol trades on four times 2021 earnings, which is calculated using what we feel are relatively conservative currency and oil price assumptions. This is very attractive for a business of its quality. We have used the share price weakness to increase our exposure but remain cognisant of the risks surrounding recent announcements and are managing the position size carefully.

Corporate action

The quarter was also characterised by corpo­rate actions in several stocks that the portfolio was invested in. Some of those worth mentioning include:

Prosus, the newly established corporate entity that will house Naspers’ global internet portfolio, including its stake in Tencent and its interests in online classifieds, food delivery and online pay­ments. During the quarter, Naspers listed and part unbundled 26% of Prosus to its underlying shareholders. This listing is another positive step by management in its efforts to try and narrow the discount at which Naspers trades relative to its underlying intrinsic value. A foreign listing of Prosus will assist Naspers to pursue its ambitions to become a leading global consumer internet business by giving it access to a wider pool of investors and capital.

Furthermore, going forward, the two-tier cor­porate structure provides Naspers with more financial flexibility and the ability to more effi­ciently manage the discount to its underlying intrinsic value by using capital allocation tools such as share buybacks. In this corporate action, we elected to take the full allotment of Prosus shares, given the value unlock opportunity that we expected.

In July, global food and beverage conglomerate PepsiCo announced a takeover bid for Pioneer Foods, at a more than 50% premium to the Pioneer share price at the time. The subsequent repricing of our holdings in both Pioneer and Zeder (whose largest asset is its stake in Pioneer) contributed meaningfully to performance during the quarter. We used the rerating in Pioneer to sell out of our position and redeploy the proceeds into other, more attractive investment opportunities.

Trencor recently announced that it will be unbun­dling its Textainer stake to its shareholders in the coming months. Coronation has been actively pushing for this unbundling over the last few years and we are extremely pleased that it is finally pro­ceeding. The share price reacted positively – up 37% for the quarter – and this also contributed meaningfully to quarterly performance.

In this volatile and uncertain world, our objec­tive remains to build diversified portfolios that can absorb unanticipated shocks. We will remain focused on valuation and will seek to take advan­tage of attractive opportunities that the market may present and in so doing generate infla­tion-beating returns for our investors over the long term.


The Coronation Global Emerging Markets Strategy returned -4.6% during the third quarter of 2019, slightly behind the -4.3% return of the benchmark MSCI Global Emerging Markets Total Return Index [1]. The cumulative performance for 2019 remains very pleasing at +23.8%, which is 17.9% ahead of the index return of 5.9%. Over one year, the Strategy has returned 10.0% (12.1% alpha), and over three years, 7.2% p.a. (1.2% p.a. alpha).

Although we are very pleased with these strong short-term returns, the long-term nature of the Strategy makes lon­ger-term returns more meaningful for assessment. In this respect, while the five-year return is slightly behind the benchmark (-0.1% p.a.), the seven-year (2.5% p.a. alpha), 10-year (2.8% p.a. alpha) and since-inception figures (4.2% p.a. alpha) are all pleasingly strongly positive.


The largest positive relative contributor to the Strategy during the quarter was New Oriental Education. The share was up by 15.0% during the quarter after delivering positive full-year results (the company’s financial year end is 31 May), rein­forcing the guidance that margins will improve in the years ahead as New Oriental’s heavy invest­ment in new capacity starts to mature.

The company currently earns operating margins of 12%, well below the 18% it used to earn three years ago before it started investing heavily to grow its capacity, which has since doubled. We met with management in Beijing in August, and our positive long-term view on potential was reinforced – the margins on mature operations exceed 20% and unsuccessful sites can be fairly easily shut down if they are not meeting expectations.

Were the business to stop growing today, the ramp-up of New Oriental’s already-opened learn­ing centres (which are not fully contributing to revenues), combined with the increase in margins that accompanies this (the company is incurring the full cost of employing teachers and paying rent), could see profits double within three years.

This is in addition to the substantial organic opportunities available to New Oriental, whose market share is still in the single digits, despite being the largest operator of on-site, after-school tutoring facilities in the country. New Oriental contributed 0.50% of alpha during the quarter; however, the strong share price performance reduced the relative attractiveness of the share, and we reduced New Oriental from a 3.1% posi­tion to 2.5% as a result.

The second-largest relative contributor was Wuliangye Yibin (Wuliangye), the Chinese baijiu spirits brand. Although up by ‘only’ 5.8%, the minimal index weight and negative return of the index mean Wuliangye contributed alpha of 0.39% to the Strategy.

Over the quarter, one of our analysts visited the company at its headquarters in mainland China for the second time this year, a visit that rein­forced the positive steps the company is taking to improve its pricing ladder and increase the share of premium baijiu within its portfolio. Over the last year, Wuliangye has returned 87.1% and has contributed 2.7% to the relative performance of the Strategy. It remains a top 10 position in the Strategy despite this strong performance, as we believe it is a unique asset, capable of compound­ing earnings at 20% p.a. for the next few years, and this is not yet reflected in the share price.

Other meaningful contributors during the period were British American Tobacco (+5.5% for 0.37% alpha), Brazilian education company Estácio (+14.5% for 0.31% alpha) and global brewer Anheuser-Busch InBev (+7.9% for 0.19% alpha).

Sidestepping Juul

The big news in the tobacco industry was the aborted merger attempt between Philip Morris International (PMI) and Altria. As PMI share­holders (2.5% of Strategy), we were vehemently opposed to the deal and communicated this strongly through a letter to the board immedi­ately upon announcement of the merger talks. The market’s reaction to the deal (PMI fell as much as 9% on the day of the announcement) clearly sent the same message to the affected parties. We were against the deal for a variety of reasons, not least of which is the very negative regulatory environment for combustible cigarettes in the US currently, to which PMI would have been exposed through Altria’s US operations.

Furthermore, Altria’s shareholding in electronic cigarette company Juul is problematic as Juul is a potential competitor to PMI’s well-received Heat-Not-Burn IQOS product, which will be launched in the US shortly (by Altria, with a royalty payable to PMI). Juul has come under sig­nificant regulatory scrutiny due to the prevalence of teenage vaping, which itself has been partly driven by dubious marketing tactics and an array of flavours that give the impression that vaping is harmless. We believe IQOS has tremendous long-term potential in many markets (it has been very successful in Japan, Korea and parts of Europe already) as a means of reducing the consump­tion of more harmful combustible cigarettes.

We did not want any exposure to Juul, so, as PMI shareholders, the failure of the merger talks was, in our view, a very positive development.

Tensions hit China

On a less positive note, the biggest detractor for the quarter was Chinese classifieds business, which fell 20.6% for a -0.80% impact. The two biggest ‘verticals’ within are prop­erty and jobs (blue collar), both of which are (in theory) affected by the broader macroeconomic slowdown being experienced in China. Trade war fears have intensified negative perceptions of stocks exposed to the broader economy and, with viewed in this light, it has fallen for reasons of sentiment rather than fundamentals.

Towards the end of the quarter, fell sig­nificantly after a competitor Meituan Dianping (a new Strategy holding, which we discuss in more detail lower down) moved into the blue-collar jobs market. One cannot dismiss this development, given Meituan’s disruption of other internet-based platforms; however, in our view, Meituan’s jobs platform is more suited to matching users of its delivery services with adver­tisers in the restaurant and service industry. This is a specialist niche within the broader market and, we believe, is unlikely to materially impact on’s appeal for jobs postings.’s earnings before interest, tax, depreciation and amortisation margins (mid-20%s) are below most peers in other countries, despite earning similar gross margins.

Over time, as the business continues to scale up and investment declines, profits should grow at a rate materially higher than revenue growth. continues to deliver operationally, with revenue up 21% and operating profit up 24% in the first half results to end-June 2019. It now trades on a 12% free cash flow yield (to enterprise value), which is very attractive in our view, and so it remains one of the largest positions in the Strategy.

Other big detractors for the quarter were the relative underweight in Taiwan Semiconductor Company, which returned 19.1% in the quarter and cost the Strategy 0.43% in relative performance. Chinese wealth manager Noah Holdings declined by 31.3% in the quarter and the 1% position (at the start of the quarter) therefore cost the Strategy 0.30% in relative performance. The Strategy’s other baijiu holding, Jiangsu Yanghe, fell by 17.8% to also cost the Strategy 0.30% in relative perfor­mance, while the ongoing political strife in Hong Kong weighed heavily on Hong Kong-listed life insurance group AIA, which fell 12.1% and cost 0.29% in relative performance. AIA generates about 40% of new business in Hong Kong and it is estimated that half of this comes from main­land China. In addition, 30% of new business is originated directly in China. Although it was only a small detractor in the quarter (0.18% negative contribution), the Strategy’s Ctrip holding was also negatively affected by China-Hong Kong developments, as travel bookings are a large part of its business, and China-to-Hong Kong travel makes up around 30% of outbound ticket­ing volumes processed by Ctrip.

Shopping list

There were several new buys in the Strategy, the largest of which was Meituan, mentioned above. Meituan is a platform business offering food deliv­ery services (such as Uber Eats), hotel booking and in-store services such as restaurant bookings, movie tickets and hairdressers (to name but a few examples). Meituan has a number one or two position in its various business niches and lever­ages its massive scale to gain a cost advantage over weaker peers. In food delivery, it competes primarily with Alibaba-backed, while in hotel bookings it has surpassed Ctrip in the lower end of the market (when measured by room nights, but not by revenue, since Ctrip targets mid-to higher-end hotels). Online penetration in most categories remains quite low, so there is still sub­stantial room for the market leaders to take share from offline over time, which will further enhance their cost advantage over time.

Another new buy was Indian online travel agency (OTA) Make My Trip. We have met this business several times over the years and believed it had significant potential, as it has many similari­ties to Ctrip, which has been in the Strategy for some time. The Indian market is, however, several years behind China’s. India is also a far more cost-conscious market, with lower per capita incomes. The airline industry is dominated by low-cost car­riers and the hotel industry is also focused mostly on lower-tier hotels. Travel is still predominantly domestic and for leisure, which is more price sensi­tive. With more than half of air tickets still booked offline and perhaps 80% of hotels booked offline, the runway for online to take share from offline is significant, and Make My Trip already has more than 50% market share in the online space after acquiring the second-largest OTA in India (Ibibo).

The relatively faster growth of the non-air tick­eting part of the business in recent years has resulted in air ticketing revenues making up only a third of revenue, from more than 50% a few years ago. In addition to airline tickets and hotels, Make My Trip offers a variety of value-add services such as train ticket bookings (the state-run railways in India are not easy to book online), car hire, full package holidays, travel insurance and assistance with procuring visas. As these higher value-add services grow in the mix, we believe Make My Trip’s profitability will be significantly enhanced, as it is currently lossmaking. Naspers was previ­ously the largest shareholder in Make My Trip, fol­lowed by Ctrip, but a recent shareholding struc­ture change has resulted in Ctrip becoming the largest shareholder, with Naspers becoming a material shareholder in Ctrip. We believe that Make My Trip will benefit from having a dedi­cated OTA as its largest shareholder, since Ctrip has been through a similar development and learning curve in China.

Another new buy in India was Axis Bank, the third-largest private bank in the country. We have previously highlighted the investment case in the private banks in that country as they take market share from the poorly run public sector banks in what is still a fast-growing market overall. Axis is a previous Strategy holding that we sold when it started to approach our assessment of fair value. Like many of its peers that grew too fast, the book quality deteriorated and some time was needed to clean up the bad debts. A highly regarded new CEO was brought in and the share price recovered strongly. Axis is increasingly becoming a more retail-focused bank, which, in our view, is signifi­cantly more attractive than focusing on corporate loans, which are more competitive and can have a bigger negative impact on the book (as we have seen in the bank and its peers historically).

More recently, the (relative) slowdown in the Indian economy, the liquidity issues within the banking sector as a whole and the aggressive pro­visioning of old loans under the new CEO saw the Axis share price decline by around 20% from its second-quarter peak. At these levels, we believe Axis offered significant upside and we started to build a small position toward the end of the third quarter. As the bank is growing quite fast, it also needed to raise capital, and we were able to purchase most of the position during this capital raise at a discount to the prevailing market price. Subsequent to purchasing the position, the Indian government reduced corporate tax rates, which will be positive for shareholders of Axis and share­holders of some of the Strategy’s other Indian pure domestic holdings, like HDFC and HDFC Bank.

The last new buy was a repurchase of Turkish discount retailer BIM, one of the best-performing businesses anywhere in the world over the last two decades. We had sold out of BIM in mid-2018 due to the economic crisis in Turkey and a loss of confidence in the country’s government, which looked to be operating in an increasingly popu­list and haphazard fashion. BIM has continued to grow its store network through all of this and has gained share by limiting price increases in an environment of very high inflation within the Turkish economy. The Turkish lira, which was one of the worst-performing currencies in 2017/2018, has stabilised, and with interest rates and infla­tion declining, we believe that BIM will continue to deliver high returns on capital in an improving economy in the years ahead.

Two small positions were sold to zero in the quarter – Global Mediacom in Indonesia (we still retain a small position in free-to-air TV operator Media Nusantara, which is majority owned by Global Mediacom) and bank holding company Itaúsa in Brazil.

Members of the team travelled extensively during the quarter, meeting management of over 100 companies in various locations, as well as con­ducting site visits to holdings in Russia, China, Hong Kong and Macau. Travel will continue in the fourth quarter, including a visit to Brazil, whose weight in the Strategy has declined to 6.3%, the lowest it has been in several years.


Over the past three months, the Strategy’s gross return was -1.8%, while the MSCI Frontier Markets Index [2] returned -1.1%. Since inception, the Strategy’s return is +1.8% p.a., which compares to +0.6% p.a. for the index. Index heavyweight, Kuwait, was down -2.9% in US dollars over the past three months. Vietnam (+5.4%), Romania (+3.9%), Egypt (+3.7%) and Sri Lanka (+3.5%) all performed well, but several other frontier markets saw large declines.

Latin America

By far the most significant move during the quarter was Argentina, where the market was down a staggering -48.6% in US dollars. The presidential primary election in August saw the populist candidate, Alberto Fernández, defeat President Mauricio Macri by a far greater margin than expected. The reaction of the market was brutal. The Argentine Index lost almost half of its value in US dollar terms on the day following the announcement, bond markets immediately priced in a much higher probability of default, and the currency lost almost 25% of its value within a week.

The Argentine businesses we own in the Strategy were not spared, and together detracted -2.6% from the performance of the Strategy during the quarter. Policy uncertainty increased significantly for many businesses in the country. This means the level of conviction an investor has on the future cashflows of these companies reduced consid­erably. As a result, we were not tempted to buy domestic-focused businesses, despite many of them being valued at half of what they were only a few months ago.

However, there are a few Argentine businesses where a large portion of their revenues are generated outside Argentina or are denomi­nated in US dollars. With costs largely peso-de­nominated, these businesses are well positioned to improve profit margins on the back of the cur­rency weakness in Argentina. A case in point is, the leading online travel company in Latin America, which generates the vast major­ity of its transactions outside Argentina. In addi­tion, the company has a large cash balance in US dollars. Following the share price weakness during the past quarter,’s valuation is even more attractive, and we used the opportu­nity to add to this position.


In Bangladesh, the Dhaka Stock Exchange Broad Index was down -8.8% during the quarter. Sentiment was negatively affected by the ongoing litigation between the largest mobile operator, Grameenphone, and the telecom­munications regulator. The regulator is claim­ing approximately $1.5 billion in fees and taxes from Grameenphone. The regulator even issued a notice requesting that the company explain why its licence should not be revoked. Three months ago, we wrote that we sold out of Grameenphone as we believed the share price did not adequately reflect the risks.

Other frontiers

In Nigeria, the Main Board Index lost -8.2% over the past three months. Banks were under pressure on the back of new minimum loan to deposit reg­ulations. This is an attempt to force banks to lend more in order to stimulate economic growth. For the banks, this will likely result in lower net inter­est margins as competition to lend to high-quality clients increases.

If banks are going to increase lending simply to achieve the target ratio without proper consider­ation of the economic fundamentals, we will likely see higher non-performing loans as a result. The Strategy owns only one Nigerian bank, Stanbic IBTC. This bank is well positioned to meet the new requirements, and we are confident that the bank will not abandon its high lending standards simply to boost its loan to deposit ratio.

The largest contributor to the Strategy’s perfor­mance over the past three months was Eastern Tobacco, the monopoly tobacco company in Egypt, which added 1.0% to performance. We increased the position in Eastern Tobacco during the quarter and this business is now the second-largest position in the Strategy. The company has a new management team that is actively working to transform the company from a bloated state-owned entity to an efficient man­ufacturing business. The next few years should see improved profitability as the new initiatives bear fruit. What also excites us is the improve­ment in the board’s approach to capital alloca­tion – it is no longer looking at non-core projects and is increasingly focused on returning cash to shareholders.

Other large contributors to performance during the quarter were Zimplats (+0.8%) and Dragon Capital’s Vietnam Enterprise Investments Limited (VEIL) Fund (+0.9%). On the back of the strong performance of VEIL, we reduced the position during the quarter, but VEIL remains a top 10 holding in the Strategy. VEIL holds many com­panies that we view as attractive investment opportunities, but for which foreign ownership limits prohibit direct purchases at quoted prices. Buying VEIL allows us to access these opportuni­ties without paying the large premiums required to attract foreign sellers.

The valuation metrics of the businesses we own in the Global Frontiers Strategy are extremely attractive at the moment, with many businesses on single digit price-to-earnings multiples and high dividend yields. If we compare our assess­ment of the intrinsic values of the companies in the Strategy to the current share prices, it shows that the upside to fair value for the Strategy, as a whole, is currently at one of the most attrac­tive levels since it was launched almost five years ago. While frontier markets can be volatile in the short term, we believe the businesses we own in the Strategy offer very attractive long-term return prospects.


As 1 October was the Strategy’s birthday, it is useful to use this time to reflect on the year that was, and the road travelled thus far. Over 11 years, the Africa Frontiers Strategy has returned gross 7.3% p.a. This is well ahead of the FTSE/JSE All Africa (ex-South Africa) 30 Index [3], which has returned -1.0% p.a. and is also ahead of the MSCI Emerging Markets Index [4] (+4.7% p.a.) and the MSCI Frontier Markets Index [5] (0.4% p.a.). Given how tough things have been on the conti­nent over this period, we feel that 7.3% p.a. is a reasonable return. After a strong year last year, the past 12 months have been very tough, with the Strategy down 12.5%. The FTSE/JSE All Africa (ex-South Africa) 30 Index is up 2.8% over the same period. The main driver of the current year’s weak performance has been the change in valu­ation methodology to our Zimbabwe assets. The two names most affected, Econet and Delta, have been a combined detractor of 14.5% over the period. Phrased differently, the portfolio, exclud­ing the valuation change in Zimbabwe, was up around 2%, roughly in line with the index.

Africa has been a tough place to be this year, with most indices negative in US dollars over the past 12 months. Ghana (-29.9%), Nigeria (-14.9%), Mauritius (-9.5%), Kenya (-5.7%) and Morocco (-1.3%) have all been weak. Egypt has been the only market with a positive return, up 6.7%.

Pros and cons

Zimplats, another Zimbabwe stock (although Australian-listed and thus not subject to trading and repatriation issues), has been the largest contributor this year, with Egyptian schools operator, Cairo For Investment and Real Estate Development, and Eastern Tobacco close behind. On the other hand, Nigeria has been tough. Of the five largest detractors, ex-Zimbabwe, four of them are Nigerian. While the long-term invest­ment case remains, in the short term, share prices can be volatile.

Stocks in Nigeria have come under pressure as the Central Bank governor continues to pursue a raft of unorthodox economic policies as he looks to defend the value of the naira – at the expense of all else. His latest circular requires banks to meet certain loan-to-deposit thresholds (in practice, more like loans to total funds). This is an attempt to force banks to lend in order to stimulate eco­nomic growth.

In reality, his high interest rates, prohibitive cash reserve ratios and meddling in the cur­rency market are more than enough to offset any potential economic growth benefit that forcing banks to lend will have. The more likely outcome is that competition for high-quality corporate borrowers increases, driving down bank net inter­est margins. In time, non-performing loans are likely to grow, a function of banks being forced to lend rather than being able to appropriately price risk. We are increasingly worried about the impact this is having on the Central Bank’s balance sheet and the country’s finances. While we will never be able to predict the event that will bring these activities to an abrupt halt, we do know that they are not sustainable in the long term.

What we bought

During the quarter, we increased our exposure to BAT Kenya, a subsidiary of British American Tobacco (BAT) and the largest tobacco company in Kenya. After several tough years, following the 2015 doubling of the excise duty on cigarettes, the market is showing signs of returning to sta­bility. First-half earnings grew 25% year-on-year and should continue to be strong. Illicit volumes have started to decline. After peaking at 15% of the market last year, they now account for around a 12% share.

Prior to the excise hike, illicit volumes were below 5% of the market. BAT Kenya is a large exporter and is benefiting from an improved economic outlook in a number of key markets. This is translating into increased sales volumes into the East African region. Finally, the move to next-generation products is not limited to the developed markets but is also an area the company is exploring in its home market of Kenya. The potential to migrate consumers from combustibles to nicotine alterna­tives is significant.

We also increased our exposure to Egypt’s largest private hospital group, Cleopatra Hospitals, over the period. Hospital penetration in Egypt is incredibly low, at 1.3 beds per 1 000 people (South Africa in 2005 had 2.8 beds per 1 000) and demand for private hospitals over­whelms supply. Cleopatra has six out of the top 13 private hospitals in Cairo and is well positioned to capture this demand. While organic growth continues to be very strong, Cleopatra is also able to supplement this via greenfield and brownfield acquisitions. As these hospitals are added to the group, the company can exact synergies, improve the standards of the acquired hospitals and drive margin expansion. Sustainable, long-term earnings growth is certainly possible. The big risk is execution, ensuring that the group continues to function at the highest level while growing rapidly.

All strategy returns are quoted gross of fees. For a side-by-side comparison of gross and net performance, please refer to:

The Strategy’s performance over the past year has been disappointing, but we continue to believe that the write-down of the Zimbabwean expo­sure was prudent and protects investors in the Strategy. Any improvement in the transactability of the country should see strong improvements in our realisable values.

We remain incredibly excited about the busi­nesses owned in the Strategy. The asymmetry between risk and reward is as attractive as we have ever seen it over our 11 years of investing in Africa. The businesses in the portfolio continue to perform well, and operational performances are increasingly divergent from share price performances. Valuations are at levels we have not seen for many years and our estimate of upside to portfolio fair value is at some of the highest levels we have seen in the Strategy’s history. Thank you for your continued support


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Lisa Haakman is an analyst with 18 years of investment industry experience.