Global Emerging Markets Leaders

We sold two positions in China, unfortunately before the recent stock market rally. We used the sale proceeds to reallocate into other Chinese companies in the portfolio where we had greater confidence.

Estun Automation (China: Industrials) was a company we had sold on valuation concerns in the past, and when the share price fell sharply earlier this year, we bought it again. Long-term growth opportunities such as an ageing population needing more automation remains intact but financial risk had elevated and we quickly concluded that the quality of business was lower than when we had owned the company previously. We allocated the funds into Inovance (China: Industrials), which operates in the same sector but has a larger variety of products. Inovance is looking to shift to a regional sales network and cross sell products to their existing customer base. We believe the company provides access to industrial automation growth in a higher quality business. 

The other stock we fully exited in China was Kingmed Diagnostics (China: Health Care) which was a small remaining position and had already been partly sold down on regulatory fears.

We also sold Kotak Mahindra Bank (India: Financials). We have seen Kotak, and other private banks, finding it harder to attract deposits that will allow them to keep growing loans. In India, it used to be the case that public sector banks were so poorly thought of and untrusted that few people and businesses would risk their savings at one of these government-owned banks. 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 Kotak who now face tougher competition from the public sector banks. With prospects for growth looking weaker and some remaining concerns about company management, we exited the position.

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. 

The three businesses we sold – Hoya (Japan: Health Care), Komerční banka (Czech Republic: Financials), and Dr. Reddy’s Laboratories (India: Health Care) – all remain high-quality franchises, with long-term managers, and conservative financials. However, we believe the companies were getting closer to being fully valued given the underlying growth and profitability of the businesses. As such, we decided to use the proceeds to invest in ideas where we saw the potential for better returns.

Our first new position was a business we have previously owned, Estun Automation (China: Industrials) – a leading robotics franchise in China. Estun is run by ambitious, long-term managers watching over a business that continues to take share in a growing market. We had sold our position previously on valuation concerns and, following a halving of the share price, have taken the opportunity to re-purchase given the runway of growth left ahead.

We also bought Ping An Insurance (China: Financials). Ping An is the second largest life and general insurer in China, with a history of steady profitability, and is gaining market share through their brand and distribution advantage. We believe they still have opportunities to grow and invested in the company at what we believed to be a very compelling valuation.

We also took the opportunity as valuations have reduced across a number of our high-quality Chinese holdings to invest more. A few of these include Glodon (China: Information Technology), Kingmed Diagnostics (China: Health Care), and Yifeng Pharmacy Chain (China: Consumer Staples) – all well placed to be the leaders in their respective industries, aligned with the broader sustainable development of the economy, and remain on reasonable valuations for steady growth.

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.