January witnessed mixed results, but the overall gloominess sent stocks around the globe and in our target markets downward. The tapering of the US Federal Reserve's monthly purchase program by another $10 billion sent shock waves around several economies. The Turkish market collapsed over 10% in euro terms, only to be eclipsed by the phenomenal devaluation of the Argentine Peso, and the consequent 20% drop of the Buenos Aires Exchange in euro terms.
The portfolio experienced a brisk pick-up in equity prices early in the month as some of the year-end trouble looked to be a thing of the past, with many portfolio holdings rising closer to their true value. However, the general end-of-month global gloom wiped the early gains out, and the portfolio exposure to some of the hard-hit markets returned the month’s performance close to zero.
Amid the turbulence, the team visited companies in Pakistan where local business sentiment has stayed very positive. Following conversations with people ranging from factory floor workers to executives, we continue to be impressed with our current Pakistani investment – a fertilizer company – while keeping eyes on a few similarly interesting businesses.
We spent the month of February visiting the management teams of several interesting companies in Oman, Vietnam and Indonesia. In addition to our travels and the 20 company visits, the month was also busy given the publication of our portfolio companies’ annual reports. The results for most of them were very positive and in line with our expectations.
In Indonesia, we met with the CFO of a real estate developer on the 50th floor of the skyscraper that his company erected. They have built a strong brand in the upper-middle-class segment, evidenced by the presales of one their most recent projects, where December alone brought in more than $80 million in presales. Nearly half of that project’s 3,000 apartments were sold within a couple of months.
Omani grain silos did not offer the same vistas, but we met with local producers of food and other basic goods during our visit to the country. Among others, we placed on our watchlist a wheat products company whose expansion plans into Yemen and Somalia indicate strong growth potential.
The month also brought along a couple of sales in the portfolio. The Malaysian bus leasing company experienced a decrease in profits, which will likely remain lower given the potential of higher interest rates in the country. The Mexican paper recycler’s growth and future outlook also weakened enough to merit the sale of its shares, just before a larger drop in stock price.
We look forward to receiving most of the remaining annual reports in March and expect to make new investments in the near future.
March brought along new trips to a few continents, company visits, and the remaining annual reports. Reading through the results was enjoyable, given that on average earnings of the portfolio companies had risen nearly 40%, while revenues advanced 25%. The companies were still, however, quite inexpensive (with a portfolio P/E average of 8x and EV/EBITDA less than 6x) and we believe this bodes well for the future of the portfolio.
While in Africa, we visited Kenya, Botswana and South Africa. Meetings with CEOs helped both update information on current holdings and deepen our understanding of new firms. We found promising businesses, one of which was a Gaborone-based company focused on consumer loans. Over the years, the firm has expanded into eleven different countries and is the sole international player of its type on the continent.
In Asia, along with the multiple company due diligence visits, we made a few new investments. The Malaysian clothing retailer is leveraging its outlet concept to accelerate the expansion; we are interested to see how the new stores will impact the firm’s bottom line this year. The stores are situated in mid-sized cities around Malaysia with minimal competition. In Pakistan, we invested in a materials company with very strong free cash flows, which should support the portfolio.
It is not common to run into companies with continued profit growth of 20% and a P/E ratio of 5x. If such a company also pays a dividend yielding 10-20% and has its fundamentals in order, one can only wonder how this can be. On occasion we do come across such firms in frontier markets. This time around in Pakistan.
In April, we met a dozen companies and managing directors, the majority of whom work in Lahore – a calmer and vibrant part of the 180-million-strong market. Our most interesting meetings were with cement and energy players, while textile mills’ prospects had turned south from the positives of 2013. One of our investments recently became one of the most effective cement firms in the market by using Western production methods and taking control over their own distribution. In addition, their new products and improving energy production promise to improve margins further.
We also investigated companies in Dubai where the market rally is still headstrong. Equity valuations are still increasing, but we have found it difficult to justify the price multiplication without a corresponding increase in profits. Additionally, the housing boom, which has already doubled real estate prices in 18 months, begins to resemble the boom of 2007. The growth may continue for some time, but we have stayed in companies where the valuation is not based on faith that profits will simply double each year. We trust in the strength of the value approach.
For years, the typical problem hindering the Kenyan landowner has been lack of money and know-how, which has left many valuable properties undeveloped. A local company that we visited saw this problem as an opportunity and last year created a funding program that allowed it to develop these properties and to split the profits after the sale. Our discussions with the management convinced us also of the potential in the company’s other programs, and so in May we made an investment in it. In addition, invested in another firm on the African continent, an East African insurance company.
Surprisingly, the May breeze was cooler in Istanbul than in Finland, but that has not stopped keeping the Turkish markets warm for the past few months. We visited half a dozen of good-value businesses, of which an appliances manufacturing company was the most interesting. They build household appliances for the domestic market and TVs and other electronics for the European markets. Their margin improvement program had already shown clear results in the year’s first quarter.
In addition to the number of miles covered, May added to our faith in the strategy’s ability to find companies whose growth and strategy have been hidden from the markets. The coming summer months will take us to South and Central America, as well as to Vietnam.
Traffic in Ho Chi Minh City and Jakarta served as a concrete reminder of the growth of Asia. It is good to reserve an hour of travel time between meetings even when the distance is only a few kilometers. Despite the traffic, we were able to meet promising companies, some of which operate in the transportation sector. Our research and conversations led to an investment in an Indonesian car loan company.
Our South American trip coincided with the World Cup rather appropriately emptying the streets. Luckily, the important Chilean game landed on a Saturday, enabling convenient visits to Santiago-based construction and agriculture companies in the days prior. In Peru, our meeting topics were airports and future infrastructure projects.
During the month, we followed the tightened Pakistani security situation and learned that locals call the current events “political noise”. Overall, the Karachi stock exchange did not react strongly. In contrast, on the other side of the bay, the overvalued Dubai stock market dropped 20% in June, reminding us of why we invest in value shares.
July was certainly not a slow month, given active global markets and new investments in the fund. Our portfolio companies mainly published positive news, and three of them experienced near 20% increases in just one day. One of these was an auto and bus operator on the Indonesian island of Java, which rose from its historic lows by 80% within a matter of a few days. On the flip side, the debt worries of Buenos Aires resulted in a 20% drop in the shares of a mobile services company mainly based in Argentina.
During the month, we continued conducting due diligence by meeting with the management of companies in both Central and South America. We invested in a Chilean real estate developer whose activities are mainly in the urban centers of the country. We also added a Peruvian logistics operator that manages several seaports and airports. The value of the company’s land holdings alone exceed its current market value.
We expect market volatility to continue during the coming weeks and to affect some of our portfolio countries. However, we do trust that the benefits of diversification and a value approach will continue to support market outperformance, as they did this month.
We invest in companies, not countries. However, the politics of countries often affect our portfolio. The judicial confirmation of the coming presidency of Joko Widodo got the Jakarta exchange moving as investors trusted that reforms would come. Shares of our real estate developer in Indonesia experienced significant price appreciation when the coming leadership indicated that the Jakarta residential real estate market would be opened to foreign investors. The company is also waiting for a final approval to start building an island off the coast of Jakarta that will house tens of thousands of workers and residents.
Another example is found in Pakistan where the government has implemented meaningful reforms attracting large investments into the country’s energy sector. The investments will increase overall energy production by 50% in the coming few years, and the growth will benefit our portfolio company that manufactures a large part of the nation’s transformers. The company has performed well in the portfolio during the summer and we expect the growth story to continue.
The month’s visits focused on a few cities in Vietnam and Thailand where we met nearly twenty companies. The conversations with CEO’s and CFO’s led to one investment and to a few potential targets to follow.
Our fund is built of individual companies. Though that we do not follow a benchmark, every now and then it is still informative to keep pulse of how the markets are moving and to see the bigger picture. To that end, the winds of September brought back market volatility that among other things dropped the MSCI Emerging Markets Index by 4%. The Evli Emerging Frontier was able to hold its own and rose over 4% during the month. We do not try to claim that the fund will go up during both stormy and peaceful weather, but we do believe that our focus on high-quality value companies in the developing economies made this result possible.
Good portfolio news beat the bad ones. Both of our Turkish IT investments created new partnerships with Asian IT giants. One of the two has also been the second-highest climber on the Istanbul exchange in September, and the improved margins have brought the company clearly back to black. Meanwhile, in Pakistani our cement company investment has continued to appreciate as the political atmosphere has turned more peaceful. In Kenya, our insurance company had strong support from the markets, while a power generation company in the Philippines was the fastest riser on the Manila Exchange after posting news about new power facilities.
October was a month of some extreme numbers and showed the importance of diversification among countries and industries once again. While Malaysia, Indonesia and their neighbors fell over 10% momentarily, Turkey and Pakistan, as well as several other markets, continued strong growth. Both Turkish IT companies that we mentioned last month increased over 20%, and our Chilean real estate developer did almost as well thanks to clearly improving numbers.
We seized the decline and bought more shares in several companies including a household furniture manufacturer that without a particular reason fell 15%, a drop that proved momentary. On the negative side of the portfolio, our Kenyan supermarket chain has unfortunately been unable to fix cash flow problems and due to the worsening financial conditions we decided to remove it from our holdings. At the same time, we also sold a Pakistani textile company’s shares, as well as our holding in a Turkish office equipment company, while replacing them with two companies in Pakistan and Malaysia from similar industries but with better fundamentals.
The November air in Istanbul had already cooled, but the local exchange was still doing well. The market, which has been on an upswing for some time now, got an extra boost from the falling oil prices. We decided to make a visit and meet with our portfolio companies, while also looking for potential new investments, since our Turkish investments had appreciated strongly. We ended up shaving some of our current investments, and making two new ones, including in a maker of high-end bathroom tiles, which had experienced strong growth, but at the same time sustained its good valuation and a 5% dividend yield.
A couple of days before our trip to Bangladesh we were warned about potential “chaos” due to the decisions of the local war crimes tribunal. We travel to many challenging regions, but don’t take unnecessary risks, and as such we decided to move our trip to a later date.
The portfolio had a very active month. Our greatest tragedy struck in Thailand where a portfolio company which manufactures electronics announced a 40% uptick in its earnings – on the same day when one of its factories was destroyed in a fire. The company shares fell 35%. Fortunately, we maintain a well-diversified portfolio, and our Pakistani cement firms provided a good counterbalance by surging 25% during the month, and our South African airline reached almost similar numbers by increasing 20% thanks to falling oil prices.
Saudi Arabia is still inaccessible to tourists, but the country holds a lot of promise due to its sizeable population and continuing reforms. The opening of the Riyadh stock exchange to foreign investors is a part of these larger changes. In December, we visited companies in both Jeddah and Riyadh. CEOs were hopeful despite the shock therapy the local exchanges had undergone due to the falling oil prices. Many companies hold some promise, but we are still waiting for more attractive pricing.
The streets of Cairo did not reflect the oil-infected negative mood, but were upbeat thanks to the continuing reforms and policy changes. We met with companies from several industries, of which construction sector seemed most interesting. There is plenty to build as the country still has a shortage of over three million houses. We made an investment into a real estate-focused bank with a portfolio of thousands of apartments.
The developing markets’ exchanges experienced some heavy volatility in December with the funds in our peer group falling 2% on average. We were pleased with our strategy as the fund instead returned 2% for the month.