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BlackRock Frontiers’ Argentinian exposure does well

BlackRock Frontier Markets reports that, during the year to 30 September 2016, its NAV increased by 9.3%, significantly outperforming the benchmark, the MSCI Frontier Markets Index, which rose by 0.9%. The MSCI Emerging Markets Index rose by 16.8% over the same period. The Directors are recommending the payment of a final dividend of 4.00 cents per ordinary share (2015: 4.15 cents). Together with the interim dividend of 2.60 cents (2015: 2.40 cents), this represents a total of 6.60 cents (2015: 6.55 cents), an increase of 0.8%.

The managers’ report says that the portfolio benefitted from increased exposure to Argentina, particularly in
the high beta financial sector. Positions in Banco Macro and Grupo Financiero Galicia increased in value by 107% and 75% respectively, contributing to the positive relative performance from Argentina over the year. However, the standout performer for the year was utility company Pampa Energia, which gained 116% over the same time period, rallying after it completed a controlling stake acquisition of Petrobras Argentina in July. Strong performance continued through the third quarter of 2016 as the company announced plans to double production capital expenditure to meet rising power demand and reduce reliance on imports. It was further supported by the recent Supreme Court’s ruling in favour of allowing electricity providers to raise prices, a key victory for President Macri in his fight to cut back on fiscally expensive subsidies.

Stock selection was the main driver of overall performance.  A position in Pakistani utility company, Hub Power, continued to add value gaining 28%. Investors remain attracted to the power producer’s ability to utilise
effectively both locally sourced and imported coal to cut into the country’s power deficit, while also benefitting from the Company’s US dollar return profile in a low interest rate environment.  More broadly, Pakistan rallied on the MSCI announcement, upgrading the country to “emerging market” status with effect as of mid-2017, sparking increased interest in a market with one of the lowest price-to-earnings ratios in Asia.

Similarly, a position in Vietnamese consumer discretionary name, Mobile World, surged by 130% over the period as Vietnam sees strong smart phone adoption and growth. The broader Vietnamese market experienced strong market returns as the new government focused its agenda on increasing GDP growth and attracting foreign multi-national investment, showing continued commitment to reforming foreign ownership rules and improving the investment environment domestically. Romanian utility, Electrica, also performed well, gaining 23% during the period on the back of better supply performance and lower losses from its maintenance division.

On a relative basis, the fund’s long standing underweight to Nigeria continued to benefit the portfolio significantly, as the market sold off -40% over the year as the country officially lifted currency controls in mid-June which led to the subsequent c. 30% devaluation of the Nigerian Naira. The managers says that, until policy makers come to terms with the need for a more flexible exchange rate that can slowly help improve foreign exchange shortages, they will remain underweight Nigeria but continue to be invested in cash generative, local franchises such as Zenith Bank and Nigerian Breweries. Similarly, an underweight to Kuwait also contributed positively on a relative basis as the Gulf States have yet to see a currency adjustment on the back of lower oil prices. The portfolio remains approximately 20% underweight to the Middle East region versus the benchmark. This is in contrast to their overweight positioning within oil sensitive Kazakhstan, which saw a full devaluation of the Tenge in 2015.  Within Kazakhstan, performance was driven by KazMunaiGas EP which gained 28% over the period. Halyk Savings Bank also contributed positively following the delivery of strong earnings.

Broad exposure across the energy sector weighed on returns as the fall in the oil price significantly impacted corporate revenues and export earnings. The Iraqi name, DNO, was one of the largest individual detractors falling by 52% over the year. Despite very low internal lifting costs, the significant impact on the Kurdistan Regional Government budget from lower oil prices restricted their ability to make payments to the international oil companies, putting additional strain on their balance sheets. Kenyan financial, Equity Group, was also among the largest detractors falling by 27% in August alone, following suggested legislation that would cap the interest rates of new loans at 400 basis points above the base rate set by the Central Bank of Kenya. Despite
this, the stock rebounded by 12% in September as the bank is likely to be a longer-term beneficiary of the subsequent industry consolidation.

BRFI : BlackRock Frontiers’ Argentinian exposure does well

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