Portfolio Discussion
Emerging markets (EM) equities climbed higher in Q3, adding to a positive year for the asset class. The ability to perform amid an eventful macroeconomic environment, characterized by government changes, geopolitical tensions and monetary policy shifts, demonstrated EM resilience. Furthermore, global markets have reacted favorably to US and local central bank decisions to lower interest rates. In addition, China announced a package of economic measures to stimulate economic growth, spurring Chinese equity market gains. China and India were the main contributors to the MSCI Emerging Markets Index, while Korea was the primary detractor in Q3. Our portfolio slightly lagged the benchmark for the quarter.
Our main leading relative detractors for the quarter included Samsung Electronics (OTCPK:SSNLF), Cosmax and Kaspi. Samsung Electronics is one of the world’s leading producers of memory semiconductors, mobile handsets and other digital convergence products. The company’s stock struggled this quarter amid production setbacks for its high-bandwidth memory (HBM) chips, an essential component of artificial intelligence processors. As a result, investors are growing uncertain of the company’s competitive edge in HBM technology. As the market for AI continues to evolve, we remain vigilant in monitoring our position in the company.
Cosmax is a Korean cosmetics manufacturer and global leader in the original development and design manufacturing (ODM) space. It offers design, material sourcing, manufacturing, product management and branding services to independent cosmetic and skincare brands. Shares of Cosmax declined recently due to concerns about weak consumer demand in China, stemming from the country’s broad economic slowdown. Despite weakened demand, we believe China’s economic stimulus plan has the potential to boost consumer spending if the right measures are implemented. We remain constructive about Cosmax’s global growth prospects and uphold our belief in its competitive advantage in the ODM market.
Kaspi is a leading Kazakhstani banking-fintech company offering a differentiated platform that integrates an online marketplace, consumer-to-business payment system and banking services in a single app. Kaspi’s ability to seamlessly integrate financial services and e-commerce has enabled it to monetize this synergy well, and we believe its breadth to be valuable. However, the company’s stock sold off in September following a report published by an activist investor. Company management denied the report’s claims, and the stock has partially recovered. Kaspi’s positive momentum in past periods of market volatility gives us confidence that the management team can successfully navigate this challenge.
Top relative contributors for the quarter included MercadoLibre (MELI), Samsung Biologics and E Ink Holdings. MercadoLibre is the leading e-commerce platform in Latin America. We have long believed in the company’s diversified growth strategy, and we view the company’s expansion of services beyond e-commerce as indicative of its success.
The company continues to make strategic investments in its infrastructure, including the expansion of its Mercado Pago and Mercado Crédito platforms. We believe the company’s expansion into the credit market will provide the stock with new upside potential and that it is well positioned for future growth as its fintech and e-commerce services become more integrated.
Samsung Biologics is a leading Korean biopharmaceutical company. The stock performed well this quarter, buoyed by significant milestones, including two major FDA approvals for new drugs. The company has successfully established partnerships with many top global pharmaceutical companies, enhancing its client relationships and paving the way for greater visibility. Additionally, the company has made notable progress in securing large-scale manufacturing agreements with prominent drugmakers. We believe Samsung Biologics is gaining significant momentum and is well positioned to capitalize on emerging opportunities in the biopharmaceutical market.
E Ink is a Taiwan-based producer of e-paper technology used in e-readers, such as Amazon’s Kindle, and electronic shelf label (ESL) systems used to display pricing on retail shelves. The company’s stock was supported by the implementation of its ESL systems in retail stores. Additionally, the company’s shift in focus to digital signage, catering to both indoor and outdoor usage, has expanded the applications of its e-paper technology and presents a new market for its products. We are confident in the company’s future growth prospects, particularly due to its strong moat and unique position in the industry. We believe in the widespread adoption of e-paper technology and recognize the critical role E Ink plays in this process.
Portfolio Activity
During the quarter, we exited our positions in Chilean winemaker Vina Concha Y Toro and Chilean wireless operator Entel. We also closed our position in Gold Fields, a South African mining company. We believe in the value of gold as a hedge against the macroeconomic risk posed by the developed markets’ stretched monetary and fiscal policies. However, Gold Fields has not consistently met its operating guidance, eroding our confidence in its ability to deliver. Recurring health and safety incidents in the company’s mines further contributed to our decision to exit the position.
By exiting these positions, we were able to initiate positions in BIM Birlesik Magazalar and Kia. BIM is the largest supermarket chain in Turkey. Having long tracked Turkey’s economic development, we view BIM as a compelling opportunity to invest in the country’s growing economy. The company leads Turkey’s discount supermarket segment, with most of its products sold under private-label brands. This business model yields strong economics and an attractive return on equity. We believe in the company’s ability to outperform as Turkey continues to adopt more orthodox economic policies.
Kia, a Korean automaker, is a company previously held in our portfolio. We found the company to be a compelling investment once again due to its successful repositioning as a more sophisticated car manufacturer. Through its significant investments in research and development, the company has made great strides in producing electric vehicles and hybrids as well as incorporating AI technology into its new models. We believe Kia is on track to build even stronger brand equity. In addition, we see positive changes in its corporate governance, which gives us greater confidence as minority shareholders.
Perspective
As we approach the end of the year, we remain cautiously optimistic about the EM asset class. Central banks in many EM countries were exemplary in managing inflation and have started easing monetary policy. A lower rate environment will allow companies to take advantage of growth opportunities and boost investor sentiment toward the asset class.
China remains a focal point, with the government implementing a stimulus package at the end of Q3 aimed at stabilizing its weakening economy. In our team’s travel to China, we have seen its economic slowdown firsthand and believe the government’s efforts to be necessary. While these measures are considerable, the key challenge remains restoring consumer confidence. It is still too early to know how effectively these policies will restore consumer confidence and generate a sustained economic recovery.
We expect a volatile market environment through the end of 2024. Geopolitical tensions, including two wars, continue to weigh on the overall risk environment. These violent conflicts have impacted millions of lives and disrupted global value chains. In addition, the outcome of the upcoming US presidential election will have meaningful implications for global markets and likely further contribute to volatility in EM.
Read the full article here