Brandes Investment Partners Emerging Markets Equity Strategy Notes Second Quarter 2021 (1 April– 30 June 2021)
Total Page：16
File Type：pdf, Size：1020Kb
Brandes Investment Partners Emerging Markets Equity Strategy Notes Second Quarter 2021 (1 April– 30 June 2021) The Brandes Emerging Markets Equity Strategy returned 8.39% (gross of fees), outperforming its benchmark, the MSCI Emerging Markets Index, which was up 5.05% in the second quarter and the MSCI Emerging Markets Value Index, which was up 5.67%. Positive Contributors After a relatively weak share-price performance for much of the past 18 months, select holdings in Latin America, especially Brazil, Mexico and Argentina, did well in the quarter. Notable contributors included regional jet manufacturer Embraer, integrated oil firm Petrobras, bank Banco del Bajio, agricultural company Adecoagro and food distributor Sendas Distribuidora. Embraer continued to see normalisation in its legacy business segments. The company also managed to enhance its margins after unwinding some administrative redundancies that had been put in place in anticipation of the joint venture with Boeing. Furthermore, in June, Embraer announced that it was in talks to merge its Eve Urban Air Mobility subsidiary, which develops electric vertical take-off and land (eVTOL) aircraft, with Zanite Acquisition, a special purpose acquisition company. The press reported a tentative merger value for the eVTOL venture of approximately $2 billion; however, the definitive agreement and the terms of the deal have not been confirmed. Banco del Bajio announced stronger-than-expected Q1 earnings due to lower cost of risk and operating expenses. Meanwhile, Adecoagro continued to benefit from higher commodity prices and the expectations that it would be able to maintain its healthy free cash flow. With the share price appreciating to our estimate of the company’s intrinsic value, we sold the holding in the quarter. Continuing the trend from last quarter, our exposure to cyclically oriented and economically sensitive sectors such as energy, materials and industrials helped performance. Additionally, information technology services provider Chinasoft International saw its share price increase on the back of a strong earnings growth outlook and better-than- anticipated initial adoption of its Harmony operating system. Performance Detractors While our underweight to China aided relative performance, several of our holdings there performed poorly. These included Wynn Macau, Gree Electric Appliances, Galaxy Entertainment Group and Ping An Insurance. We took advantage of the share-price weakness to add to our positions in Gree and Ping An in the quarter. Other detractors included Thailand-based banks Siam Commercial Bank and Bangkok Bank. A resurgence of COVID-19 cases has complicated the re-opening of economies in many developing countries, including Thailand, and presented growing challenges for companies such as Siam Commercial Bank and Bangkok Bank. Select Activity in the Quarter We initiated positions in South Korean bank Hana Financial Group and memory storage supplier SK Hynix, as well as China-based Wens Foodstuffs Group. A dominant player in the global memory storage devices market, SK Hynix holds a strong footing in both DRAM (i.e., temporary memory storage commonly used in personal computers, servers, mobile devices) and NAND flash (i.e., permanent memory storage used primarily used in mobile devices) memory market segments. While we have owned Hynix’s peer Samsung for several years, this was the first time we purchased Hynix’s shares. Historically, Hynix’s technology and scale disadvantage meant it was unable to create value through a cycle, with its profits and stock price declining 50-80% from peak-to-trough. However, the operating landscape for Hynix has improved over the last decade as the industry has consolidated to three major players (Samsung, Hynix and Micron Group). This development, coupled with Hynix’s success in making its technology more competitive, has allowed the company to generate through-cycle returns above its cost of capital. While SK Hynix’s business remains highly capital intensive and may still generate negative free cash flows during demand downturns, we believe its overall risk/reward profile has materially improved. Brandes Investment Partners (Europe) Limited Registered in Ireland at 36 Lower Baggot Street, Dublin 2, Ireland +353 1 618 2700 | [email protected] | www.brandes.com/emea | Reg. No. 510203 | Regulated by the Central Bank of Ireland FOR PROFESSIONAL INVESTORS ONLY Furthermore, the company should, in our opinion, benefit from several secular trends in technology, including cloud computing, artificial intelligence, 5G, and autonomous computing, all of which will likely trigger a spike in the demand for both DRAM and NAND flash. Additionally, over the past 20 years, the memory storage sub-industry has enjoyed faster growth in revenues than the overall semiconductor industry. As such, we would expect Hynix to grow at a rate slightly greater than the estimated global GDP (gross domestic product) going forward. Given its valuations and growth potential, Hynix offers an appealing value opportunity to us. Founded in 1983 originally as a chicken breeding operation, Wens Foodstuffs Group entered the hog production business in 1994. The company’s main business is the breeding and sale of yellow-feather broilers and hogs, where it holds market shares of 7% and 3%, respectively. Since 2018, China has experienced record-high hog prices due to the supply shock caused by African Swine Fever (ASF), which—at its peak in 2019—led to a significant contraction in the country’s hog herd. The impact at the company level has varied dramatically depending on each company’s ability to contain the virus within its own operations. Local investors focus mainly on the near-term hog price cycle, which is driven by the industry’s progress— or lack thereof—in containing ASF, as evidenced in the recent outperformance by the more resilient companies amid a second wave. This creates an investment opportunity, in our opinion, as the market may be underappreciating the multi-year potential for market consolidation by the large players, even those whose production has been temporarily affected. We believe Wens is well positioned to benefit from a potential recovery in the Chinese protein industry. Among the large producers, Wens was one of the hardest hit by ASF. The company is taking the necessary steps to correct the situation, and we believe investor sentiment will improve once production starts to increase. The stabilisation in the sow herd suggests that a recovery is on the horizon, but there is usually a time lag of 9-12 months until we can see an increase in hog sales. Moreover, although Wens was greatly impacted by ASF, it has remained one of the lowest cost producers in the world’s largest hog market, a market that is ripe for further consolidation given its fragmented nature and where large-scale producers tend to have sustainable cost advantages over smaller competitors. Beyond our new purchases, major activity in the quarter included the sells of Adecoagro (as noted above), PetroChina, South African bank Absa Group and South Korea-based S-1 Corporation. Year-to-Date Briefing The Brandes Emerging Markets Equity Strategy rose 12.86% (gross of fees), outperforming MSCI Emerging Markets Index, which increased 7.45%, and the MSCI Emerging Markets Value Index, which rose 10.01% for the six months ended 30 June 2021. As was the case in the quarter, performance was led by holdings in the industrials, energy, and materials sectors, most notably Embraer, Cemex and National Atomic Company Kazatomprom. Select technology holdings also performed well, specifically Chinasoft International and hardware storage and peripherals company Wiwynn. Holdings in China, primarily Ping An Insurance, Gree Electric Appliances and TravelSky Technology, weighed on returns. Additionally, our underweights to India and Taiwan hurt relative performance. Current Positioning The portfolio’s positioning has not meaningfully changed so far this year. As of 30 June, the Brandes Emerging Markets Equity Strategy held its largest sector overweights in real estate and consumer staples, and maintained key underweights to technology and materials. From a country perspective, even though Chinese companies made up our largest allocation, we were still significantly underweight the country relative to MSCI Emerging Markets. Additionally, we had lower weighting to Taiwanese companies than the benchmark, although our exposure has increased in 2021. Meanwhile, holdings in Mexico, Russia and Indonesia continued to represent our largest country overweights. The recent favourable environment for value stocks has again highlighted how our strategy has tended to do well when the value index outperforms the general market (MSCI Emerging Markets Value Index vs. MSCI Emerging Markets Index). We believe value stocks in general and our strategy in particular remain attractive for the long term given a variety of potential tailwinds, including: • Potential post-COVID economic recoveries in emerging markets, especially those that have had a harder time handling the virus, namely countries in Latin America and Southeast Asia. • A possible increase in inflation and interest rates, which has historically benefited value stocks. Brandes Investment Partners (Europe) Limited Registered in Ireland at 36 Lower Baggot Street, Dublin 2, Ireland +353 1 618 2700 | [email protected] | www.brandes.com/emea | Reg. No. 510203 | Regulated by the Central Bank of Ireland FOR PROFESSIONAL INVESTORS ONLY Additionally, we are optimistic