Global Emerging Markets Leaders Sustainability

Claudia Sheinbaum was elected the first female President of Mexico with such a resounding victory that her party now holds a two-thirds majority in both congressional houses, which means it could make constitutional changes such as the proposal that Supreme Court judges would be directly elected by popular vote. 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 bottom-up stock picking process with a focus on quality and a 10-year time horizon on growth, allowing us to take advantage of irrational price movements.

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. Amoy Diagnostics (China: Health Care) is another China business we have sold out of but this time after a period of better performance.  Whilst we still like the way the business is managed, the high operating margins (c.27%) generated in the healthcare sector means we have become worried about the regulatory environment potentially aiming to reduce those margins. The final Chinese position we sold is Foshan Haitian Flavouring & Food (China: Consumer Staples), a food flavouring and seasoning producer that has seen its operating margin contract 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.

We initiated a new holding in Midea (China: Consumer Discretionary), China’s dominant domestic home appliance manufacturer, which is expanding into attractive growth areas like digital building automation, integrated energy management and industrial robotics. We also initiated a new holding in Sunny Optical Technology (Hong Kong: Information Technology) which is a top-tier manufacturer of camera lenses for use primarily in smartphones, but where most of the value lies in their burgeoning vehicle camera business, where lenses are used in driver assistance systems. In both cases, a core set of cash flows linked to Chinese consumption are being valued modestly by the market, and little value is being assigned to the significant opportunities in new business areas.

We also initiated new holdings in Hong Kong Exchanges & Clearing (Hong Kong: Financials), which owns a legal monopoly on trading in many types of financial securities in Hong Kong, with most activity linked to Chinese companies, and in AirTAC International (Taiwan: Industrials) which manufactures pneumatic equipment used in manufacturing, and which derives over 90% of sales from China. Both are superb, high barrier to entry businesses, and whose shares are sensitive to perceptions of the broader Chinese economic environment which are now particularly negative.

We also added to two existing Chinese holdings; semiconductor design company Silergy Corp (Taiwan: Information Technology) and construction software vendor Glodon (China: Information Technology) during the quarter. In both cases we remain convinced of both the fundamental quality of these businesses and the people who run them. Their shares have been sold off sharply as a function of the current broader pessimism around China.