THE FUND

The fund rose 4.1% Net TR (SEK) during the month compared to MSCI FM xGCC Net TR (SEK), which rose 3.3%. The funds major overweight countries such as Egypt, Pakistan, Nigeria, and Sri Lanka performed well while negative contributions came from Vietnam, Argentina, Kenya and Morocco.

The fund’s positions in Egypt contributed positively, especially Juhayna, Ezz Steel and Arabian Cement, each increasing 10-12%. Given declining interest rates and curbs on inflation, infrastructure development and consumerism are likely to benefit attracting investors to Materials and Consumer Staples. Juhayna announced its annual result, reporting EPS of EGP 0.21, +269% Y/Y. Juhayna’s earnings are likely to strengthen further in FY18 as it benefits from a stronger macroeconomic environment, which should drive a recovery in consumer spending amid easing inflationary pressure. In addition, the recent decline in global milk prices (-21% in 6M) and ongoing initiatives to improve operating efficiency should further support earnings. Ezz Steel will benefit from: (i) interest rate cuts in Egypt; (ii) potential downward gas price revisions and (iii) solid demand for steel in past months as a result of higher infrastructure and residential construction activity in Egypt.

Stock selection in Nigeria also added to relative positive returns, with Unilever Nigeria increasing 21% and Zenith Bank was up 9%. Our off-benchmark stocks, Cargills and Nestle Lanka inched up 11% each on positive result expectations.

A significant negative contributor was Vincom (up 16%), a Vietnamese real estate company, where the fund maintains an underweight. Vincom has appointed international banks for an IPO of its recently completed project, Vinhomes, which is expected to be a multibillion dollar IPO and which is driving investor interest in the stock. The fund switched its partial position from Hoa Phat Steel to Hoa Sen Steel. Hoa Phat had a run up of more than 100% in past few months and is now trading at 3x of Hoa Sen’s valuation. Hoa Sen is trading at EV/ton of ~USD 240 and ~P/E 5x, making it one of the cheaper steel manufacturers in the region.

THE MARKET

MSCI FM xGCC Net TR (SEK) rose 3.3% during the month compared to MSCI EM Net TR (SEK), which rose 0.8%, and MSCI World Net TR (SEK), which rose 1.2%. The US Dollar strengthened against Swedish Krona by more than 5% during the month, which explains most of the absolute returns. The strongest markets were Kenya, Vietnam, Kuwait and Kazakhstan. Argentina and Bangladesh continued their downward trend and were the weakest markets during the month. While optimism in Kenyan GDP growth increases, inflation reading marked a 55-month low and remains comfortably within the Central Bank of Kenya’s target range of ~5%. Kenya raised USD 2bn in a Eurobond issue which was oversubscribed 7x, making it one of the highest order book for an issue in Africa. Egypt raised USD 4bn triple tranche bonds from international debt markets, listed in London Stock Exchange. This should ease a crippling dollar shortage and release a deluge of foreign inflows into Egypt’s high-yielding debt market. As expected, Egypt decreased its interest rate by 100bps to 17.75% amidst falling inflation. Bangladesh’s political situation remained jittery with the key opposition leader sentenced to a five-year prison term, posing some threats to political stability before elections this year. However, on the positive side, a Chinese consortium of Shanghai and Shenzhen bourses successfully fended off India’s National Stock Exchange for a stake in the Dhaka Stock Exchange. China outbid India for the purchase of 25% stake in the Dhaka Stock Exchange for a sum of USD 119m, in addition to USD 37m in technical support.

Pakistan witnessed an easing in political situation at home with Senate elections expected to be held on time. However, the geopolitical situation worsened, with Pakistan being placed on Financial Action Task Force’s (FATF) grey list (effective from June 2018) on charges of weak financial systems to prevent money laundering and terrorists financing. In an election year, any major shifts in policy are likely to emerge after general elections in the next 4-5 months.

ESG ENGAGEMENT

Hoa Sen Group was the only new company added to the Sustainable Frontier Fund in February. Hoa Sen Group is a Vietnamese company manufacturing and trading steel sheets. The company was founded in 2001 and is headquartered in Di An, Vietnam. Its products are exported to 70 countries and territories. The company has established Hoa Sen University offering training, research and community service focused modules. They also focuses on social activities geared towards charity and sustainable living for the community. In 2016, Forbes Vietnam Magazine featured Hoa Sen Group as one of the top 40 Vietnamese brands in the country.

The fund did not divest any companies during this month.