Emerging Markets Strategy August Commentary

Overview

General equities performed strongly during August, supported by ongoing easy monetary policy. Global infrastructure, including our Global Listed Infrastructure funds, underperformed general equities.
Economic data continued to show signs of a strong rebound from the COVID-19-induced lows of the second quarter, albeit the rebound continued to moderate. Infections continued to grow, although resulting mobility restrictions were targeted rather than general, thus mobility remained largely unchanged. Furlough schemes were extended in many jurisdictions and jobs data was stronger than expected. Positive news flow around vaccine development also helped buoy markets.
Monetary policy remained easy, with governments continuing to support economies. Bond rates are expected to remain low for a significant period, with the U.S. announcing an average inflation targeting framework. Concerns continue around rising inflation risk given monetary policy; however, this risk is offset by the significant slack in global economies.

Portfolio Performance

On a sector basis, transport stocks were the top contributors to monthly performance (+1.34%), of which Chinese airport operator Shanghai International Airport (+0.37%), Mexican airport operator Grupo Aeroportuario del Pacífico (+0.26%) and Mexican rail company GMexico Transportes (+0.20%) were the lead performers.

Shanghai International Airport (SHIA) is the operator of Shanghai Pudong International Airport, the major airport of Shanghai and the second largest in China in terms of traffic. At present, SHIA’s asset base consists of two terminals (T1/T2) and two new satellite terminals (S1/S2), four runways, and facilities for serving passengers and handling cargo. Market sentiment on Chinese airports has improved, driven by its recovering domestic passenger trends and encouraging developments for regional and international flights — in mid-July, inter-provincial tour groups in China resumed after suspension for months and Macau also scrapped border restrictions with mainland China.

Grupo Aeroportuario del Pacífico SAB de CV (GAPB) is Mexico’s largest airport operator with a portfolio of 13 airports focused in Mexico’s Pacific region and with an additional airport in Jamaica. Recovery in passenger volumes has been fast in recent months and higher than what the market had expected for GAPB, helping its share prices.

GMexico Transportes (GMXT) owns and operates 10,400 km of rail network in Mexico and the U.S. GMXT’s consolidated rail portfolio is the largest in Mexico. Shares rose on decent quarterly results and a slight M&A premium associated with GMXT following investor interest in its competitor Kansas City Southern.

Turning to Asia Pacific, Indian gas utility Gujarat Gas (+0.38%) also contributed to monthly performance.

Gujarat Gas Limited (GUJGA) is a city gas distribution business. It is one of India’s leading natural gas distribution companies, processing and distributing compressed natural gas and liquefied petroleum gas to transport, domestic, commercial and industrial consumers. GUJGA has been benefiting from a fast recovery in its gas volumes.

Indian rail company Container Corporation of India (-0.57%) was the largest detractor from monthly performance.

Container Corporation of India (CONCOR) is India’s largest container train operator, with 75% market share. The breadth of its terminal network and expansion plans mean CONCOR’s freight transportation services are crucial to the functioning of the Indian economy. Shares were lower amid requests for higher lease payments from Indian Railways.

All returns are in local currency.

Positioning and Outlook

This Strategy is invested in high-quality companies benefiting from structural drivers, with strong cash flow and dividend yields. We have strong conviction in the long-term opportunities within emerging markets listed infrastructure. At the regional level, the Strategy is split between Asia Pacific EM (68%) and Latin America (28%), with the remainder in cash. At the sector level, the Strategy is split between economically sensitive user-pays assets (38%) and regulated utilities (58%).

For the RARE Emerging Markets Strategy, the primary quantitative tool in portfolio construction is Excess Return, on which our stock ranking system is based.

Monthly Stock Highlight

This month we review the Filipino port operator, International Container Terminal Services (ICTS).

ICTS is a Philippines-based port operator that operates terminals through long-term concession agreements with local port authorities and governments.

ICTS has terminals primarily in emerging markets, with a primary focus on origin & destination (O&D) cargo. O&D cargoes have higher pricing power compared to transhipment cargoes, so ICTS mainly focuses on maximising the cargo yield as opposed to volumes.

About 53% of total volumes are from Asia, 30% from the Americas and 17% from Europe, the Middle East and Africa (EMEA). Even though ICTS is a proxy for EM trade, it has limited exposure to commodities, China and NAFTA-related risks. The aggregate port utilisation is also only about 68% and we see ample room for utilisation to increase across its ports.

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