June saw the portfolio deliver a decent absolute return, although it trailed a stronger benchmark. A big shift in sentiment was yet again evident in the asset class. China rebounded significantly on optimism over the trade impasse, adding 6%, with presidents Donald Trump and Xi Jinping agreeing at the G20 summit at the end of June to reopen trade negotiations. Given a notably more dovish US Federal Reserve (it would appear rate cuts are back on the agenda), markets moved towards more upbeat expectations generally. Most other Asian markets also added decent single-digit absolute returns. India was the only significant outlier, as it registered a small loss. While the market certainly took the re-election of Prime Minister Narendra Modi and the Bharatiya Janata Party positively, the focus should now return to the economy, which is showing signs of faltering.
Exposure to India detracted the most from relative performance as, in aggregate, the portfolio’s holdings lost value. On an individual stock level, Emami (personal care products) was the most challenging position, losing over 15% in the period. Emami has had a tough couple of months, hit both by disappointing earnings and major shareholder stake sales. “Share pledging” is endemic in India. This typically occurs when a company’s major shareholder “pledges” a proportion of their shares as collateral for bank loans. There is nothing intrinsically wrong with this practise – let alone illegal – but the promoter risks becoming a forced seller if collateral values fall.
Emami itself remains largely unleveraged, but the major shareholder has been struggling to reduce debt elsewhere in the extended family business. They sold 10% of Emami back in February and then another 10% in June. This reduces the family stake to 53%, but it also removes much of the lingering share overhang, it minimises “pledging risks” and it provides funds to cut debt at the family level. This is all good news, but Emami’s share price has unfortunately suffered during this process. As far as Emami’s fundamentals are concerned, the business has taken time to recover from the impact of demonetisation and Goods and Services Tax (GST) rollout. The return ratios have taken a beating and earnings have plateaued. That said, Emami consistently generates $75-80m of cash each year and with decent valuation support, a strong brand and solid market position, we are sitting tight for now.
Elsewhere, there were some losses in the portfolio’s Mexican holdings, with Walmart de Mexico (retailer) weakest, losing around 4%.
Unsurprisingly, most of the top performing names from an absolute perspective in June were in China and Hong Kong, with Yum China (restaurants), AIA (Insurance), Yili (Dairy) and Anta Sports (sportswear) all among the strongest performers in the period.
Russian retailer Magnit also had a decent period, rallying around 6% in the month. It is rarely a dull moment with Magnit, which announced in the month that company president Jan Dunning would take over as CEO following the departure of Olga Naumova, who lasted just 12 months in the role. This is not ideal, as change seems to be the only constant at Magnit, when the company really needs to focus on its strategy execution. We have a lot of respect for Dunning, who comes with a strong pedigree, having successfully turned around the hypermarket chain Lenta in his last role. Having said this, the problems at Magnit clearly run deep. We bought Magnit in late 2017, building our position in the subsequent months due to the strength of its franchise, its seemingly highly efficient logistical network (in a geographically challenging country) and the alignment we had with the other owners. These positive features are not reflected in the current valuation, in our view, which seems to be dictating a very negative outcome. Magnit is cheap by nearly any measure, but it is certainly testing our patience, even as long-term investors.