Global Emerging Markets All Cap

Over the course of the quarter, we have sold out of one of our Indian banks. RBL Bank (India: Financials), which we purchased in December 2023. We liked the new management team who seemed determined to move the bank towards less risky (more secured) lending. We also thought the company was attractively valued. Unfortunately, the quarter after we purchased the company, it became clear that unsecured bank loans had been growing at over 30%, and the path to a more balanced loan portfolio would be a lot longer than we had expected. Added to that, we are seeing a few banks that are struggling to grow their deposit base which impacts how they can fund their loan growth. For many years, most people and businesses who deposit their money in banks avoided the public sector banks as they feared they may lose their money. The public sector banks have now improved and professionalised which is great for the Indian saver and borrower but tougher for the private sector banks like RBL who now face tougher competition from the public sector banks. With prospects for RBL looking riskier and with better ideas elsewhere, we exited the position.

We sold Yifeng Pharmacy Chain (China: Consumer Staples) as we were worried about increased regulatory oversight, such as price cuts on drugs purchased through medical insurance plans, having a negative impact on profit margins.

We also fully sold Clicks (South Africa: Consumer Staples), another pharmacy chain. Growth has been phenomenal at this business with new store openings continuing at pace and a mix of available goods and services helping to drive profits. The valuation is expensive and we decided to exit the position to fund better-priced opportunities. We think Clicks remains a very high-quality business.

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 seven companies and only bought one new company in second quarter. 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 operating profit margins generated in the healthcare sector means we have become worried about the regulatory environment stepping in to reduce those margins. We sold Kingmed Diagnostics (China: Health Care) for the same reason and both Amoy and Kingmed are good examples of where top-down country or sector views can break an investment case.

We also sold Tech Mahindra (India: Information Technology) and Dabur (India: Consumer Staples) having bought into both in 2009. Tech Mahindra (known then as Satyam) and Dabur have delivered good performance since first bought. Whilst we still believe that they are good companies, valuations are becoming problematic. Tech Mahindra has been a great investment over the last ten years but we believe we have a better option for the next ten years in Tata Consultancy Services (India: Information Technology). Tech Mahindra has seen profit margins reduce and it is also expensive. Dabur is a soaps and detergents producer in India which has delivered successful financial results but we expect growth to be lower in the future. Valuations in India remain one of our biggest concerns and we have been trimming back our positions there including Marico (India: Consumer Staples) and Mahindra & Mahindra (India: Consumer Discretionary) due to valuations. We also sold Pigeon (Japan: Consumer Staples) as we lost confidence in the speed and extent of the evolution of the business which is facing rising challenges (headwinds) such as declining birth rates.

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 Midea, China’s dominant domestic home appliances manufacturer. Midea is taking the cash flows from this business, and reinvesting behind expanding into attractive growth areas like digital building automation, integrated energy management and industrial robots.

The third new position was a re-initiation in Samsung Electronics (South Korea: Information Technology). We have long admired the strength of the Samsung Electronics franchise, along with the ability they have shown to evolve. We believe current valuations do not reflect a recovery in the memory market, or the investments that Samsung Electronics continues to make behind long-term growth. The business continues to have an impressive ability to generate cash, and a solid balance sheet.

Finally we initiated a new position RBL Bank (India: Financials), a private bank in the midst of a turnaround. The bank lost its way through aggressive growth leading to high non-performing loans (NPLs). As a measure of abundant caution India’s central bank stepped in to change management and solidify the foundations of the bank. We believe new management is putting in place the right systems to build a quality credit culture with a focus on lower risk assets funded mostly by deposits. A successful turnaround could yield attractive returns for shareholders.