On Wednesday, 4 October 2023, Mobius Capital Partners held its annual MCP Investor Day for professional investors. Due to train strikes in London the event was held virtually. Please find a recording of the event below.
The Mobius Investment Trust and Mobius Emerging Markets reached their five year track records with significant outperformance in the same week. MCP’s founding partners Mark Mobius and Carlos Hardenberg looked back on five extraordinary years since the strategy’s inception and provided an update on the portfolio, performance and strategy, as well as an outlook for Q4 2023 and beyond.
Park Systems, a Korean specialist hardware manufacturer, and Hitit, a Turkish software company, presented their respective businesses, provided an outlook for the coming years and spoke about their engagement with the Mobius Capital Partners team. Please contact Anna von Hahn at anna@mcp-em.com should you have any questions.
For Professional Investors only. Past performance is not a guide to future performance.
Jamie ColvinThe emerging market mid-cap fund has tripled the gains of its benchmark index since launch five years ago.
Gearing is on the cards for the first time for Mobius (MMIT), which previously struggled to negotiate competitive lending terms with banks.
Carlos Hardenberg, who left Templeton Emerging Markets (TEM) to form the £152m trust with Mark Mobius in October 2018, told Citywire that it had been very difficult for him to arrange competitive terms with banks in the past few years as the trust did not have demonstrable performance figures.
As a result, he decided to focus on ‘fundamental capabilities’ and prove he could ‘generate returns and robust numbers’.
Since launch the trust, which invests largely in medium-sized technology companies across emerging markets, has delivered shareholder returns of 23%, tripling the MSCI EM benchmark index’s 9%. Shares were trading at 122p on Friday, or a 12% discount to the latest net asset value of 141.3p per share.
Thanks to this strong performance the manager said he will ‘consider’ gearing going forward.
The ability to borrow money to invest has always set investment trusts apart from their open-ended peers, but it has become more expensive as interest rates have risen to 5.25% in the UK.
On top of that, while gearing can enhance returns, it can exacerbate losses, heightening risk in markets that can already be volatile.
Hardenberg, however, is not afraid of volatility, which he sees as a good thing because it presents opportunities to buy attractive companies cheaply.
Risk hot spots in emerging markets
The manager acknowledged there are several risky areas in emerging markets but said the more recent trouble for the region has been contained and concentrated among the largest businesses.
In particular, he sees problems with: technology firms, which are seeing ongoing regulatory headwinds; banks, which face increasing disruptive competition; commodities, which are heavily impacted by global trends; and China where they find management teams inaccessible.
To combat these concerns Hardenberg (pictured below) said he uses a robust and radical quality framework to ‘navigate to the right countries and avoid those most vulnerable, as well as focusing on companies run by role model management teams with no significant leverage, no reputational issues and a strong corporate culture’.
This framework has seen the managers put significant capital into one of the areas of concern, technology, which makes up over 61% of the portfolio, according to the latest factsheet.
Hardenberg said despite the risks technology is the most attractive segment next to healthcare. He pointed to strong thematic developments in that sector, such as semiconductor hardware, companies investing in digitalisation, software and artificial intelligence, as well as the transition to alternative energy.
These themes are represented in his largest holdings which are South Korean businesses, Leeno Industrial, a semiconductor component tester, and Classys, a leading developer of non-invasive aesthetic medical devices, as well as Nasdaq-listed IT consulting business, Epam.
The companies have respective weightings of 6.9%, 5.7% and 5.6%, according to the latest factsheet.
Hardenberg believes investors are too pessimistic about the next five years, emphasising that while caution is important in EM, it is still in the middle of a mean reversion and post-pandemic recovery, which is becoming more evident across Southeast Asia.
We have recently returned from a research trip to India, a visit we had been very excited about as we had missed in-person interactions with our holdings and interesting businesses that we have been following for a while. While our regular calls and meetings in London have allowed us to stay in close contact, a personal meeting with CEOs and managers on site cannot be substituted.
India in the Portfolio
India has been an important allocation for the Mobius Emerging Markets Fund since its inception. MEMF’s Indian holdings have contributed 40% to (gross) return as of the end of March 2023. This was almost entirely driven by stock selection. Our visit has confirmed our bullish outlook on the region, and the exciting companies diligent stock pickers can find in India.
Some Important Facts about India
India, a country of 1.4 billion people, and soon expected to be the most populous country in the world, offers a plethora of opportunities for us as long-term, quality-oriented investors. Companies have evolved, are increasingly more professionally managed, and are focused on corporate governance and sustainability efforts, which has helped in attracting domestic and foreign capital flows. Innovation is omnipresent, and India has created 100 unicorns in the last five years. Unrelenting deal activity in PE and VC also means new and innovative businesses available to invest in as public market investors. There are over 6,000 listed companies in the small- and mid-cap space.
Source: Bloomberg, RBI
Growing Middle Class
In India, we observe income inequality and a changing social fabric, as in most other emerging markets, but are convinced that rapid income acceleration, technological adoption and corporate spending—aided by favourable economic and fiscal policies—will keep India on a steady growth path. GDP per capita has quintupled over the last 20 years. By 2030, the Indian economy will be led by the middle class, and upward income mobility will continue to drive consumption.
Source: Brookings Institution, as of 2020, People Research on India’s Consumer Economy. *Asterix indicates forecast
The Growth Premium
In its latest World Economic Outlook, the IMF forecast India to grow 5.9% in 2023 and 6.3% in 2024, more than any other major economy. This compares to 1.3% and 1.4% projected growth for advanced economies. The Indian economy clearly has recovered from the pandemic-related slowdown and is now on an impressive, sustained growth trajectory for the next decade. Growth will primarily come from the increase in private consumption (and we have witnessed this on the ground with busy markets and fully occupied restaurants and shopping malls) and will be fuelled by a broad-based expansion of capital expenditure by the private and public sectors.
Source: World Population Review, IMF World Economic Outlook Update April 2023
Supportive Government Policies
We view the recent economic policies—including increased spending on infrastructure, incentives to boost certain niche manufacturing segments, focus on improving ease of doing business and fiscal measures undertaken to keep inflation in check—largely positively. Shortly before our visit, India’s government announced a raise in capital expenditure of 33% to 10 trillion rupees ($122.29 billion) in the next fiscal year to drive investments in infrastructure. We witnessed first-hand rampant construction activity across the cities we visited. The scale of expansion of the Metro (public rail transport) is mind-boggling and is being talked about by everyone we met. Further, construction of new expressways, bridges and airports continues to support the public infrastructure and we see this as a good indicator of the economic growth the country is witnessing.
Source: Bloomberg, Macquarie Research, As of 28 February 2023 (FY -> Apr – Mar)
Digitalising the Financial System
Another key driver of economic growth is a healthy credit cycle with multiple banks competing and lending activity again on the agenda. Our interactions with small and large banks also point to the good health of corporate credit in India which is the cornerstone of future expansion. India’s financial system has made significant progress in efficiency with technology and innovation becoming mainstream. The digital payment system UPI is basically used by every Indian and has almost replaced cash entirely (UPI enabled approximately 2,300 transactions a second in 2022). Ever-increasing smartphone penetration, combined with the government’s efforts to reduce cash transactions, has brought the majority of the population into the digital payment ecosystem. As a result, about 80% of Indians own a bank account today, a significant change from only five years ago.
China plus 1
During our visit, the world was surprised to learn about one of the largest airplane deals in recent history with Air India (the erstwhile national carrier, now owned by the Tata Group, among India’s largest conglomerates) ordering over 400 planes from Airbus and Boeing. Our visit also coincided with several global investor summits and G20 meetings and we constantly heard of the large-scale investments across diverse sectors such as manufacturing and renewable energy. India’s recovery and robust position is clearly no secret, and a term we heard everywhere was ‘China plus 1’. Although we don’t invest directly in airlines, infrastructure or asset-heavy manufacturing companies, we have found small businesses that fit our quality criteria and are poised to benefit from these sectoral tailwinds. As part of our research, we met over 20 companies during our trip in addition to economists, local fund managers, entrepreneurs and private investors.
Source: Ministry of Finance (India)
Our Portfolio Holdings
The most satisfying finding from our trip was that our holdings are doing even better than we had expected. APL Apollo Tubes, one of our key holdings for over three years, had just reported its highest ever quarterly volume of 600k tons of steel tubes. The passion and the vision of the founder MD, his attention to detail and strong intent to professionalise the organisation with the right talent, continues to impress us. We are firm believers in investing in companies with good culture and this meeting with the MD reaffirmed APL’s focus on their culture—employees are considered family. During the visit to the warehouse of a distributor to APL for 10+ years we clearly saw the brand appeal and scale of distribution of APL Apollo superseding that of their peers. At a visit to one of their plants, we witnessed the highly efficient manufacturing process with >90% of energy needs met through renewable energy.
A key holding—and one of the top performers for us since inception—is Persistent Systems, a global digital engineering company that differentiates itself from the other IT companies in India by catering to a niche customer segment. Despite the macro headwinds, Persistent continues to be among the fastest growing companies and has kept up its trajectory of new deal wins. All our interactions with competitors and other investors highlighted the quality of management, the recent success in reorganisation and its ability to continue to grow in a difficult market. We remain firm believers in their long-term success and have successfully engaged with the company on various initiatives over the years.
A New Investment
We continue to find similar promoter-run businesses in India led by professional management teams and with a clear succession plan in place. One such new addition to our portfolio is CE Infosystems (MapMyIndia), a small yet exciting business that is a domestic leader in providing geospatial technology and automotive navigation solutions in India (please also see Company Spotlight above). Our interactions with the founding family—including the CEO and the heads of different businesses who have been with the company for over 10 years—highlighted the importance of culture in the organisation. Promoters have gradually transferred ownership in the form of ESOPs to key employees, even before ESOPs became common among tech companies in India. Coincidentally, CE Infosystems was celebrating its 25th anniversary on the day of our visit and were preparing for an organisation-wide cricket tournament. After our visit to their experience centre and the interactions with the team, we walked away with the feeling that they can innovate continually and combat disruption, while maintaining their sticky customer base.
Conclusion
India will remain an exciting country for us, and we will watch closely as the country is headed into elections in May 2024 during which the incumbent government needs to successfully navigate current economic headwinds for a third victory. During our trip we identified new potential investments in niche segments within financials, manufacturing and technology sectors which would benefit from the longer-term opportunities the country offers across consumer and corporate spending.
On 4 April 2023, Mobius Capital Partners held a Zoom webinar to provide an update on the strategy, performance, and portfolio of the Mobius Emerging Markets Fund and Mobius Investment Trust. MCP’s founding partner Carlos Hardenberg and India analyst Swathi Seshadri reported on their recent trip to India where they met with companies across sectors as well as experts from MCP’s network, including economists and policymakers.The video below is a recording of the webinar.Please email Anna von Hahn at anna@mcp-em.com should you have any questions or would like further information.
Emerging market investors have witnessed troubled waters over the past few years: a global pandemic that had a negative impact on trade, consumption, and supply chains; increased geopolitical tensions between the US and China; a war in Europe with wide ramifications for global trade and fiscal policies resulting in rising inflation, tighter monetary policy, and appreciation of the US dollar. Furthermore, volatile commodity prices that benefitted a few countries but hurt many, and very difficult capital market conditions made it particularly difficult for emerging markets. In summary, all of this has led to very low confidence, record capital outflows, and a sell-off of the asset class. Over the last 10 years, emerging markets have delivered close to negative real returns on an annualised basis. After this prolonged period of weak performance, we now see several indicators suggesting that the tide is turning.
Valuations at a Record Low
Investors should never lose sight of valuations. At the moment, we are witnessing record-low valuation levels in EM — the current average price-to-book value at nearly 1.5x is in the 30-year bottom quartile. The current P/E and EV/EBITDA market valuation indicates that emerging markets are trading at the largest discount to developed markets since 2008. At the same time, many emerging market currencies are currently undervalued.
Source: Bloomberg, as of 03 January 2023
Inflation and Monetary Easing
Inflation pressure in the US is moderating. Inflation declined to 6.5% in December compared with a year earlier, down from 7.1% in November. The slowing pace in inflation is a clear indicator that the Fed’s rate-hiking cycle is nearing its peak and monetary policy is expected to ease. Many emerging markets are ahead of developed markets in the hiking cycle and inflationary pressure, especially in Asia, remains contained. Developed markets saw an inflation increase from around 1% to around 7% on average, while inflation in Asia averages around 4%.
Highly Innovative Businesses in EM
Over the past 20 years, business models in emerging markets have significantly evolved. Investors can find highly innovative companies with unique business models led by excellent management teams that are still relatively undiscovered by the market, and currently most certainly under-owned. The new driver in emerging markets is technological innovation in areas including, but not limited to, factory automation, autonomous driving, renewable energy, AI or Internet of things (IoT), as well as digitalisation and modern and efficient service offerings. We are particularly interested in companies with predictable and stable recurring revenue streams and stable margins, for example in the software development industry.
Ever-growing Consumption and Faster Real Wage Accretion
a Favourable demographic dynamics and urbanisation in emerging markets remain structural tailwinds for the long term. The middle class in emerging economies is younger, increasingly more educated, and has demonstrated accelerated adoption of oechnology. The macroeconomic growth, combined with technological innovation, has yielded higher wage growth and disposable income in these countries. This in turn will result in higher spending and boost domestic consumption. For example, Taiwan and South Korea are expected to jump ahead of Japan in terms of GDP per capita in 2022–23.
Corporate Earnings Recovery
The corporate earnings recovery will be driven by the reopening in Asia. The average EPS growth forecast over three years annualised (CAGR) for the MSCI EM Index is 13% and for MEMF’s portfolio 15%.
Source: Bloomberg, BEst LTG EPS as of 30 December 2022
US Dollar Rally Losing Steam
The US dollar rally is losing steam on the back of favourable inflation data, easing the pressure on emerging market currencies, debt, and monetary policy.
Source: Bloomberg, as of 05 January 2023
Relaxation of Chinese Zero-Covid Policy
Chinese economic activity — that is, consumption, trade, and mobility of its population — has been radically weakened during “zero-Covid”. Now, for the first time in years, there are clear signs that China is relaxing its zero-Covid policy which will have a very positive impact on growth and supply chains. We must be mindful and prepare for a stony path to the recovery. Exports this year could be negatively impacted by weak demand from the EU and the US, booster rates among the elderly in China remain very low and the desire to reach herd immunity can take time. However, a post-pandemic recovery in China will not only serve as a domestic impulse, but positively affect all countries which trade with China, particularly in Asia.
Source: Bloomberg, Mobius Capital Partners LLP, S&P Capital IQ, IMF, National Bureau of Statistics of China, World Economic Outlook Database October 2022, CNN
Conclusion
We have heard many differing opinions about what investors can expect from the coming year. We share the view of Neil Armstrong that, “We predict too much for the next year and yet far too little for the next ten.” And one longer-term prediction continues to hold true: a recovery is still to come. A recovery not from one bad year, but a recovery from a pandemic of an unprecedented scale,- at least in living memory. As always, markets will price this in first. We have already seen a gradual reversal of fund flows back into emerging markets.
Source: Bloomberg
At Mobius Capital Partners, we continue to focus on the long-term potential of our companies which are catering to growing trends like digitalisation, quality health care, factory automation, and renewable energy and on creating long-term, sustainable shareholder value for our investors.
