THE FUND

The Fund rose 3.6% in January, compared to MSCI FMxGCC Net TR (SEK) which rose 3.3%. It was primarily the stock-picking in Pakistan that contributed positively. The sub-portfolio rose 8% during the month. The main positive contribution came from our largest holding in Pakistan, IT company Systems, which rose 20%. Towards the end of the month, it was announced that IFC World Bank would buy 20% of Systems’ subsidiary OneLoad, which is at the forefront of mobile payments in Pakistan. Further positive contributions were received from our positions in Nigeria as well as our holding in Turkey. Negative contributions accrued from the lack of holdings in Morocco and our stock selection in Vietnam. Our position in the airport operator ACV (1.2% of the fund) fell more than 10% as a result of the short-term impact from the Coronavirus. We also noted a significant correction in the Fund’s largest holding, the IT company FPT corp, which fell just below 10% during the month. In January, we sold our smaller position in Pakistani Tri-Pak. We never had the chance to build a meaningful position before the price ran away from us, therefore, we chose to exit completely. We increased our position in Sri Lanka marginally by adding additional shares to our position in Sampath Bank. The company is currently trading at around 5x earnings. We believe the Return on Equity is bottoming out at around these levels and will gradually climb going forward. The proposed tax cuts for banks alone (see text below) are likely to constitute a one-time profit growth of around 25% from the second half of 2020. The P/E ratio for the Fund’s 2019 profits is currently 7.7x with an expected profit growth for 2020 of 18%.

MARKET

January was a relatively quiet month with small movements. Of the major markets, Nigeria stood out with a rise of nearly 10% and Vietnam was the only market that fell when trading started after the Chinese New Year and the world’s stock exchanges had a few days of negative development in the aftermath of the Coronavirus.

Concerns about the effects of the Coronavirus affected our markets to some extent although the dominance of local investors normally means the correlation to global equity markets is low. Vietnam was particularly impacted. Probably to some extent because of the presence of more foreign investors in the market after the large inflows of recent years, and partly because of a slightly greater potential impact than most other markets. The country’s tourism revenue amounts to just under 10% of GDP and Chinese tourists make up about 25%. Another potential impact is due to its large dependence on trade (around 200% of GDP) where China is an important trading partner. Sri Lanka also has a relatively high proportion of Chinese tourists (around 13%) and a longer period of concern can affect the ongoing recovery in the tourism industry. In Bangladesh, we can see that just over a quarter of the country’s clothing manufacturers´ purchases come from China. An extended supply problem can affect this industry, which accounts for about 80% of total exports. From a market perspective, we can say that this time, unlike when SARS flourished (Nov 2002-July 2003), the virus so far is isolated to a much greater extent to China. On the other hand, China’s economy is currently USD 14,000 billion, compared with USD 1,500 billion in 2003 and Asian exports to China today account for 14% of the total, compared with 6.5% in 2003. The final effects on our markets and on the world economy remain to be seen. These types of events are less about actual mortality percentages and more about psychology, where production stoppages and cancelled trips can produce more long-lasting effects. Regarding the effects on the world’s stock exchanges, one should be careful to compare too much with SARS (Nov 2002-Jul 2003). It has been said that the world index fell just under 10% overall post the outbreak. However, SARS occurred after three very bleak years in the stock with the world index dropping almost 40% (USD). This time Coronavirus occurs after three years of a corresponding stock market upswing.

In January, parts of our staff changed base to Singapore. This was to effectively carry out some shorter journeys in the region. In addition to an intended trip to the Philippines which had to be cancelled due to the volcano eruption, we had a chance to visit both Vietnam and Sri Lanka. The trip to Sri Lanka was particularly interesting. It was the second time we visited the country since the terrorist attacks in April 2019. The uncertainty that then characterized the country has now been transformed into optimism. We note that the tourism industry has recovered faster than expected, although we believe that some of the high-paying tourists have been switched to more price-conscious. There is a strong optimism among the companies after Gota Rajapaksa (brother of former President Mahinda who was president in 2005-2015) won the presidential election. The most important parliamentary elections will be held in April and the hopes in the market are that the Rajapaksa brothers’ party SLPP will win their own majority and thus eliminate the political indecision that has prevailed in the country since 2015. We understand the optimism. In December and January, the newly created interim government (led by Mahinda) announced a comprehensive stimulus package with major tax cuts and payment facilitation for small businesses and agriculture. There are dramatic improvements for most sectors, including halved profit taxes for the construction and health care sector (from 28% to 14%). We also note proposals for strong stimulus to private consumption (75-80% of GDP) with a reduction of value-added tax from 15% to 8% and removal of the so-called Nation Building Tax (2% of profits) for most companies. Most of the reductions are likely to be implemented only after the parliamentary election – and provided SLPP reaches its majority. Based on Gota Rajapaksa’s clear win in the Presidential elections and based on what we hear on the ground, we would put a 90% probability that the SLPP will reach a majority in the elections this spring. It paves the way for an interesting second half of 2020 in Sri Lanka. The stimulus measures will face some criticism given the country’s relatively high indebtedness (85% of GDP) and the effects the lower taxes will have on the budget deficit (expected 6-8% in 2020). The Rajapaksa brothers have set the goal of achieving 6.5% growth annually over the next 5 years. If Sri Lanka comes close to it and in addition can increase its foreign investment, the current debt situation is likely to become secondary. As the experience from the Western world shows, growth tends to trump austerity most of the time. Based on risk-reward, we would currently place Sri Lanka as perhaps the most interesting of our major markets given the very low expectations, the depressed valuations in the equity market ​​(around 100% upside to the 10-year average P/BV valuation), the relatively cheap currency and the probability of decently high profit growth from the second half of 2020. The problem with the stock market remains the low liquidity, which created problems for foreigners who have sold in recent years and which will create problems when they again want to position themselves. For investors with a 5-10 year investment horizon, it is likely a good entry point while leftover selling from disgruntled foreigners remains on offer.

ESG Engagement

Two Pakistani companies were divested from the Fund due to financial considerations, including Tri-Pack Films Limited and General Tyre and Rubber Company of Pakistan Limited.

No companies were added to the Fund in January 2020.

DISCLAIMER: Capital invested in a fund may either increase or decrease in value and it is not certain that you be able to recover all of your investment. Historical return is no guarantee of future return. The state of the origin of the Fund is Sweden. This document may only be distributed in or from Switzerland to qualified investors within the meaning of Art. 10 Para. 3,3bis and 3ter CISA. The representative in Switzerland is OpenFunds Investment Services AG, Seefeldstrasse 35, 8008 Zurich, whilst the Paying Agent is Società Bancaria Ticinese SA, Piazza Collegiata 3, 6501 Bellinzona, Switzerland. The Basic documents of the fund as well as the annual report may be obtained free of charge at the registered office of the Swiss Representative.

 Meeting Sampath Bank in Colombo.