Emerging Markets

LGM Monthly Commentary - November 2019

Emerging markets struggled a little for direction in November with the index returning 1.7%, although a lot of this was due to AUD weakness.

The portfolio delivered a positive return in AUD during the month, marginally ahead of the wider market. Emerging markets struggled a little for direction in November with the index returning 1.7%, although a lot of this was due to AUD weakness. There was also a fair degree of divergence between countries. The US-China trade situation remains a key factor driving market performance. The passage of the Hong Kong Human Rights and Democracy Act in the US in November clearly didn’t go down well with the Chinese and they look set to retaliate with their own blacklist of “unreliable entities”. While hope remains for a “Phase 1” deal on certain goods, there is consensus building that no substantive progress will be made before the US presidential elections next year. This means we should probably expect market performance to be volatile in 2020 as it was throughout much of 2019.

We saw a bounce in some of the portfolio’s African names throughout the month, in particular apparel retailer Mr Price. Positions in Nigerian Bank Guaranty Trust, and Western Union, the market leader in international money transfer and remittances, both delivered decent gains on strong operating numbers. Security selection was mixed in our Hong Kong/China holdings. Positive gains from our noodle maker Tingyi were offset by losses in Sands China (Macau gaming), while not owning Alibaba was the largest individual detractor from relative returns. Alibaba’s share price got a boost from the secondary listing of its shares on the Hong Kong stock exchange during the month, which generated quite a lot of local interest. We don’t own Alibaba because of corporate governance concerns, something that is central in our investment philosophy.

We added two new names to the portfolio in November. Sinopharm Group, which is China’s leading pharmaceuticals distributor and Moscow exchange (MOEX) in Russia. MOEX is the only comprehensive exchange operator in Russia providing services across equities, fixed income, money markets, FX, derivatives and commodities. It is also a fully integrated service provider offering trading, central counterparty, settlement, depositary and clearing services. MOEX is a key beneficiary of financial sector reforms in Russia and increasing financial disintermediation. We believe the business model is strong and well diversified and we like that it pays out 90% of its free cashflows as dividends. This equates to a 7.8% dividend yield, which is hard to come by for such a quality operator. Unusually for us, Sinopharm is also a state-owned enterprise (SOE) – something we typically avoid in China because of habitually poor management and doubts over alignment.

However, one should never paint everyone with the same brush and Sinopharm is a rare exception to this rule with a highly incentivised and well-regarded management team. Like all distributors, operating margins are relatively thin, but a focus on maximising asset returns has nevertheless helped the company generate an attractive return on invested capital (ROIC) of more than 20%. This in turn has supported improvements to the company’s cash flow profile. Healthcare services are relatively nascent and under-resourced in China, thus offering significant growth potential over the next 5-10 years as the government focuses more on both the scale and efficiency of healthcare delivery. Given the highly fragmented nature of both upstream manufacturers and downstream consumers (hospital, clinics, pharmacies etc.), the distributors play a key role in bridging the supply gaps between these groups and ensuring effective nationwide coverage. Government policy is driving efficiency gains by cutting unnecessary distribution layers and forcing consolidation within the sector. As the leading player in this market, Sinopharm is well placed to grow its already dominant 18% market share by leveraging its extensive coverage network and superior operating efficiency. The valuation is attractive at just 12x forward earnings and 6x EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortization).

Disclaimer

This document has been prepared and issued by LGM Investments Limited, authorised and regulated in the United Kingdom by the Financial Conduct Authority, and/or BMO Global Asset Management (Asia) Limited, authorised and regulated in Hong Kong by the Securities and Futures Commission. Any reference to LGM Investments or LGM in this presentation encompasses all subsidiary companies of LGM (Bermuda) Limited (“LGM (Bermuda)”). LGM (Bermuda) Limited is a wholly-owned subsidiary of Bank of Montreal (BMO).

BMO Global Asset Management comprises BMO Asset Management Corp, BMO Asset Management Inc, BMO Global Asset Management (Asia) Limited and BMO’s specialised investment boutiques: Pyrford International Limited, LGM Investments Limited, BMO Real Estate Property, and Taplin, Canida & Habacht, LLC. BMO Global Asset Management is part of the BMO Financial Group, a service mark of Bank of Montreal (BMO).

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Company information: LGM Investments Limited is incorporated in England and Wales under Registered Number 3029249 and has its registered office at 95 Wigmore Street, London, W1U 1FD. Authorised and regulated in the UK by the Financial Conduct Authority. BMO Global Asset Management (Asia) Limited is incorporated in Hong Kong under Registered Number 325754 and has its registered office at 36/F and Suite 3808, One Exchange Square, Central, Hong Kong. Authorised and regulated in Hong Kong by the Securities and Futures Commission. The above companies are subsidiary companies of LGM (Bermuda) Limited which is incorporated in the British Virgin Islands under Registered Number 49038 and has its registered office at c/o Appleby Services (Bermuda) Ltd. Canon’s Court, 22 Victoria Street, Hamilton HM12, Bermuda.

The analysis and views expressed in this report reflect personal views about the subject and not related to any specific recommendations. The information and statistics in this report have been obtained from sources we believe are reliable but we do not warrant their accuracy or completeness. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. We do not undertake to advise the reader as to changes of our views in the future. This is not a solicitation of an order to buy or sell any specific securities. These products or services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. This presentation is for informational purposes only and should not be construed as an offer to sell, a solicitation to buy, or a recommendation for any security, or as an offer to provide advisory or other services in any jurisdiction in which such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction. © LGM Investments

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