Global Emerging Markets Leaders

Over the course of this quarter, we have sold out of two positions in China, unfortunately before the recent rally. The capital raised was mostly reallocated into other Chinese names where we had greater conviction. Estun Automation (China: Industrials) was a company we had sold on valuation concerns earlier, and when the share price fell sharply along with the rest of China, we added back into it earlier in the year. The top-down investment thesis of an ageing population needing more automation remains intact but financial risk had elevated to an extent whereby we quickly concluded it wasn’t necessarily the same business as the one we had owned previously. We allocated the funds into Inovance (China: Industrials), which operates in the same sector but with a more diversified product range. The company is looking to shift to a regional sales network to better cross sell products across their existing customer base and we feel we can access the same top-down growth driver of industrial automation but with a higher quality business. The other stock we exited in China was Kingmed Diagnostics (China: Health Care) which was a small remaining position which had already been sold down on regulatory fears.

We also sold Kotak Mahindra Bank (India: Financials). We have seen Kotak, and other banks, finding it harder to attract deposits that will allow it and the others to keep growing loans at a fair clip that warrants the valuations the bank is currently on. It used to be the case that public sector banks were so discredited that no depositor would want to risk their savings at one of these state-owned banks. But this sector has been really cleaned up, which is great for the Indian consumer but makes for a more difficult competitive environment for the private sector banks, including Kotak. With growth looking muted and residual concerns about management, we decided to sell our holding.

Claudia Sheinbaum was elected the first female President of Mexico with a large victory that her party now holds a two-thirds majority in both congressional houses and means it could make constitutional changes. India completed the largest democratic election in the world with a surprise vote removing Narendra Modi and the Bharatiya Janata Party’s absolute majority in the Lok Sabha (also known as the House of the People and the lower house in the Indian Parliament). The Nifty 50 (top 50 stocks by market capitalisation listed on the National Stock Exchange of India) rose the day before the election on the expectation that Modi would get over 400 seats. It then fell 7% when the news broke that he had lost his absolute majority before rising again in the days afterwards as the market decided Modi staying in power with a reduced majority was a positive for Indian democracy¹. It is at times like this that we are thankful for our philosophy and process which focuses on the quality of individual companies over a long period of time.

We sold out of eight companies and only added one through the second quarter which is higher turnover than previous quarters. We sold Vitasoy (Hong Kong: Consumer Staples) after they changed their management team in Australia; but given the share price has fallen quite sharply it has been a frustrating position and we believe we can find better ideas elsewhere. We sold Amoy Diagnostics (China: Health Care) after a period of better performance. Whilst we still like the way the business is managed, the high financial performance generated in the healthcare sector means we have become worried about the regulatory environment stepping in to reduce those margins. Another Chinese position we sold is Foshan Haitian Flavouring & Food (China: Consumer Staples), a food flavouring and seasoning producer that has seen its operating profit margin reduce over the longer term and we don’t see a catalyst for them to recover. 

Centre Testing International provides inspection and certification services for industrial and consumer products across China, ensuring product quality and safety standards. The franchise benefits from being one of the first movers in the country, and continues to take share in a fragmented market as scrutiny rises on health, environmental and product standards. The balance between long-term family stewards and a professional manager who spent decades at one of the world’s leading inspection and certification services firms helped us build conviction in the quality of people here as well.

We also initiated a position in Wuxi Biologics, a leading contract research provider and manufacturer for pharmaceutical companies. The stewards have spent the last decade nurturing strong relationships with customers across geographies, and are building on their research relationships to scale up manufacturing services. The nature of the business, where the timeline from drug discovery to manufacturing can be decades, means that long-term customer relationships are crucial, and the trust built is difficult to disrupt. 

The last new addition to the portfolio was Allegro (Poland: Consumer Discretionary), the leading e-commerce platform in Poland with 40% market share. The core business has continued to be resilient through a period of mismanagement, and they remain nine times larger than their next competitor. With a new CEO in place, Allegro is focused on improving their international operations and re-focusing on profitability.

We have also continued adding to some of our high-quality holdings where valuations have become more attractive. One such example is WEG (Brazil: Industrials), a manufacturer of electric motors, which are sold into areas like electric vehicles (EVs) and renewable energy with structural growth opportunities. WEG has been consistently investing behind expanding outside of Brazil and is focused on Mexico, China, and India as their next large regions of growth. Alongside, they have recently completed their largest acquisition with the balance sheet remaining in sound health.