The market

MSCI Frontier Markets xGCC Net (SEK) fell 1.5% and MSCI Emerging Markets Net (SEK) fell 2.1% during the month. In local currency, we saw marginally rising share prices, but the dollar weakening by 4% lowered the return in Swedish krona. Best markets during the month were Nigeria (+7%) and Sri Lanka (+3%).

In Nigeria, foreigners continued their net purchases in the light of improved currency trading. However, we noted that MSCI still does not price its index according to the parallel exchange rate. The gap has however continued to narrow towards the official naira rate. The NAFEX rate strengthened from about 380 to 366 during the month while the official naira rate weakened from just over 318 to 322. Perhaps MSCI hopes markets will correct their embarrassing late decision on this issue? In its annual review, MSCI decided that Nigeria, as expected, retains its status as a frontier market for now. Evaluation will continue however and a new decision will be taken in November.

Pakistan’s first month as emerging market ended with a decline of almost 9% (6% in local currency). The disappointingly low foreign inflows and new concerns for political turmoil ahead were the main reasons. The independent investigation of Prime Minister Sharif regarding the Panama leaks is approaching its end. The Joint Investigation Team (JIT) is expected to submit its findings to the Supreme Court (SC) on July 10th. How long it will then take for the SC to announce its verdict is unknown at this stage. It can be anything from a couple of weeks to several months and it is entirely possible a decision is then appealed by either side. In case of an adverse decision against the PM, there is also a risk of early elections. As we don’t see Pakistan’s investment case being dependent on any single person or party, gradually removing uncertainty, provided a transparent process is followed (and thereby making it hard for either the incumbent government or the opposition to agitate their supporters), will gradually bring focus back to fundamentals. At least another volatile month is to be expected, and an overshoot to the downside can obviously not be excluded, but with the broader market now trading at around 10x earnings we believe the political turbulence that has plagued this year is already well discounted by the market.

The fund

The fund fell slightly more than the benchmark index and in line with MSCI Emerging Markets Net during the month. Two of the fund’s largest markets, Pakistan and Egypt, fell 9% and 5% respectively. Good stock selection in most markets, added to relative performance but could not fully compensate. Our underweights in Argentina and Romania also contributed positively to relative performance. During the month, the fund increased its exposure to Vietnam. A new holding – Kido Frozen Foods – was added. The company is due for a listing during the summer and we expect interest to be high. The fund also increased its position in Egypt, where we added to our holdings in the Egyptian car manufacturer GB Auto. We also added a new Egyptian holding, the steel company Ezz Steel, which we consider attractively valued as the Egyptian economy is expected to pick up pace towards the end of the year.