MARKET
MSCI FMxGCC Net (SEK) rose 1.2% in August, compared to MSCI EM Net (SEK) which rose 0.5% and MSCI World Net (SEK) that fell 1.6%. Argentina was the main reason for the rise in the asset class. The Buenos Aires Stock Exchange rose almost 10% in anticipation of good mid-term elections for President Macri’s party in October, when half of the seats in the lower house of Congress and one third of the seats in the Senate will be filled. The election is being viewed as an indication of Macri’s popularity as we approach the 2019 presidential elections where the fear is a return of former President Christina Kirchner. Kenya also rose 4% after the presidential election was conducted under relatively calm circumstances. On September 1st, the Supreme Court surprisingly decided to annul the Kenyan election result. New presidential elections will be held on October 17th. This is likely to lead to some turbulence in Kenya at least in the early part of September.
THE FUND
The fund fell 1.0% during the month, compared with the index that rose 1.2%. Pakistan’s weak performance (-15% in SEK during August) accounted for 2% of the fund’s underperformance during the month, while the fund’s overweight in Bangladesh costed 1%, Egypt 0.7% and Sri Lanka 0.5%. In Pakistan, Prime Minister Nawaz Sharif’s disqualification meant buyers stayed away. The absence of clear political leadership has created, what we define as, unnecessary uncertainty about the sustainability of the current expansionary economic policy. The uncertainty has caused apathy which combined with spill over selling from foreign clients has pressured the market. According to our assessment the factors that have been pushing the market downwards are well known and priced in by now but may continue to weigh on the market for some time. Tundra will publish a special summary on Pakistan during September, where we will discuss what is happening in Pakistan right now as well as potential outcomes. In what might be seen as a teaser for this special summary, in August Tundra bought back one of the most well-known blue-chips on the Pakistan Stock Exchange that we have not owned since December 2014. It is a Pakistani industrial conglomerate. As we have purchased about 1/3 of the estimated final position more details on the company will be included in the summary. The purchase was funded through the sale of Argentinean Banco Macro. It has been a difficult year, where our favourite markets have not succeeded in keeping up with the rest of the frontier markets (Frontier Index is up 22% in USD (9% in SEK) in 2017). However, when we review the fund’s portfolio we feel very comfortable. The average P/E-valuation of just above 10x with almost 20% expected profit growth in 2018 is more attractive than we have seen in a long time. We have an interesting set of companies, with a number of particularly exciting names yet to perform, which we believe have the prerequisites to deliver a good absolute return over the next twelve months.
