BlackRock Frontier Markets underperformed its benchmark over the 12 months ended 30 September 2022, returning -10.9% to the benchmark’s -7.3% (in US dollar terms – in sterling the figures were +7.7% versus +12.0%). The benchmark is a complex beast (MSCI Emerging Markets Index ex Selected Countries + MSCI Frontier Markets Index + MSCI Saudi Arabia Index) and the trust’s performance looks much better relative to the MSCI Frontier Markets Index which returned -25.2% in dollar terms (-9.6% in sterling terms). The return to shareholders was -10.0% (+8.7%). The dividend was maintained at 7 cents per share.
Extract from the managers’ report
The underperformance relative to our benchmark was due largely to our overweight positions at the outset in Kazakhstan and other east European countries which were affected by the unexpected onset of war in Ukraine and which offset generally good stock selection elsewhere.
The Company had a strong year in the UAE. Real estate developer, Emaar Properties (+45%), was the top performer as property transaction values hit a nine-year high in September 2022 due to rising demand. The company has been able to sell down historic inventories and generate significant cash flows as the market has boomed. As we have noted before, this is a reflection of a longer-term rebranding of Dubai and the UAE as an expatriate hub, be it for finance professionals or for crypto enthusiasts. Fertiglobe (+117%), the UAE’s biggest nitrogen fertilizer and ammonia producer and distributor, has been an outstanding performer since its IPO in October 2021. UAE airline, Air Arabia (+62%), was another stand-out performer as the country was one of the first to fully reopen its borders post COVID-19.
Elsewhere, Greek utility Terna Energy (+26%) benefited as the transition to renewable energy continued. Qatar Gas Transport Company (+37%) was another strong performer, as the tight energy environment meant that the company was able to raise rental pricing for its fleet. Saudi Arabian banks had a very strong year, and the Company benefited from positions including Riyad Bank (+20%) and Saudi British Bank (+20%). These banks have seen substantial increases in earnings due to strong loan growth and rising margins. Saudi grocery store operator Abdullah Al Othaim Markets (+12%) also did well as the Saudi domestic landscape evolves from mom-and-pop stores to a more premium supermarket ecosystem.
Indonesian clothing retailer, Mitra Adiperkasa (+27%) benefited from a strong recovery as the economy reopened post COVID-19 and the company has continued to take market share. Auto retailer, Astra International (+16%) benefited from the same trends, showing strong recovery through the year. September 2022 retail unit sales volumes were up 31% year-on-year and the company has also achieved an increase in market share from 51% to 56%.
While we have no direct exposure to Russia in the Trust, we did see a significant impact to our portfolio in the aftermath of the Ukraine invasion. Our positioning in Eastern Europe saw some outsized losses. Hungarian bank OTP (-67%) hurt returns, falling as 15% of its business was in Russia and Ukraine. Eastern Europe has seen significant pressure on inflation as gas prices have risen and inflation in Hungary hit 20% in September. Given the actions that we have seen from the government and central bank in looking to rein in spending and liquidity over the past few months, we believe there is value here. Polish clothing retailer LPP (-47%) also suffered, given Russia represented around 30% of revenues and had been expected to represent approximately half of the expansion plan for 2022. We also had some exposure to Ukraine via iron ore producer Ferrexpo (-70%). Interestingly the company has been able to continue exporting product albeit at a lower rate through the year. Hungarian budget airline, Wizz Air Holdings (-68%), was among the worst performers as the stock was impacted by recessionary fears and rising fuel costs with OPEC+ recently agreeing to cut production from August 2022 levels by two million barrels, representing around 2% of global oil supply.
BRFI : War holds back BlackRock Frontiers despite no direct Russian exposure