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Emerging Markets Strategy October Commentary

Overview

October was characterised by increasing uncertainty versus recent months, albeit global economic activity was significantly more robust than in the initial COVID-19 period. Hard economic data was strong, although forward indicators showed a less buoyant outlook. COVID-19 cases spiked in key regions, particularly Europe as a second wave of infections spread, resulting in the re-introduction of mobility restrictions. Whilst monetary policy remained easy, deployment of fiscal stimulus stalled, with the U.S. failing to pass further measures and a delay in the implementation of the EU Recovery Fund. Finally, political uncertainty remained elevated ahead of the U.S. election and amidst ongoing global political tensions with China.
Governments remain committed to supporting COVID-19-ravaged economies, supporting an outlook of easy monetary policy and low bond rates. Policy makers’ commitments to decarbonisation continued, supportive of infrastructure companies involved in the energy transition. Additionally, China made a new commitment of carbon neutrality by 2060.

Portfolio Performance

On a regional basis, Asia Pacific was the top contributor to monthly performance (+0.46%), of which Chinese gas utilities ENN Energy (+0.58%), China Gas Holdings (+0.34%) and Filipino toll road operator Metro Pacific Investments Corporation (+0.35%) were the lead performers.

ENN Energy is one of the major listed gas distribution utilities in China, with a nationwide portfolio of last-mile city gas concessions and the longest operating track record among the listed players.

China Gas Holdings (CGH) is the largest gas distribution utility in China, with a portfolio of last-mile city gas concessions. As the most ambitious early mover to tap into rural coal-to-gas opportunities, CGH is well-positioned to achieve stronger-than-peers volume and earnings growth.

During the month, both ENN Energy and CGH performed well amid a recent acceleration in the recovery of gas sales volume, which is on track to meet their guidance. China’s announced target of 2060 carbon neutrality also supported share prices, as it should help continue to drive China’s coal-to-gas transition. In addition, ENN raised its profit growth guidance, which was received positively by the market.

Metro Pacific Investments Corporation (MPI) invests in water, toll roads, power generation and distribution, health care services, light rail and logistics in the Philippines. The company’s water segment provides water and sewerage services through a network of pipelines, pumping stations and mini-boosters in the West Service Area of Metro Manila. MPI performed well after the Philippines made incremental changes to speed up its reopening process. These include less distancing in public transportation, allowing nonessential travel and adjusting age limits, among others.

Elsewhere in the region, Indian rail operator Container Corporation of India (+0.26%) also contributed to monthly performance.
Container Corporation of India (CONCOR) is India’s largest container train operator, with 75% market share. Shares rose on the back of improving volume data announcements.

Malaysia Airports (-0.37%) was the largest detractor from monthly performance.

Malaysia Airports (MAHB) is one of the world’s largest airport operators by passenger numbers. Based in Kuala Lumpur, MAHB operates all but one airport in Malaysia and also has a 100% stake in Istanbul’s Sabiha Gokcen airport. As an airport asset, MAHB remained weak on reduced travel volumes due to COVID-19 and increases in cases of infection across Europe and the U.S.

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 (64%) and Latin America (32%), 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 Global 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 Indian electric utility Power Grid Corporation.

Power Grid Corporation of India Ltd (PG) is India’s principal electric power transmission company. It has a share of more than 90% of India’s interstate and inter-regional electric power transmission system.

PG is a monopoly transmission utility that primarily owns and operates the inter-regional transmission lines in India. PG’s assets are regulated, which provides cash flow stability.

India plans to invest USD$36 billion in the transmission sector over the next five years. PG would account for more than 50% of this investment. In addition to the regulated interstate capital expenditure, PG will also invest in intrastate, the green energy corridor and competitive bid projects that we believe will give it consistent regulated returns.

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