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Wasatch Frontier Emerging Small Countries Portfolio   

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Q4 2018
Frontier and Emerging Markets Faced a Difficult Period in the Fourth Quarter
by Roger Edgley, CFA, Jared Whatcott, CFA and Scott Thomas, CFA

“From our vantage point, corrections in frontier and small emerging markets can provide opportunities to buy the stocks of what we deem high-quality companies at even more attractive prices.”

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The 12 months ended December 31, 2018 were a turbulent time for frontier and emerging markets, with the benchmark MSCI Frontier Emerging Markets Index down -14.60% for the full year. Wasatch Frontier Emerging Small Countries portfolios finished the year in negative territory and underperformed their benchmark. In the fourth quarter, both the portfolios and the benchmark were down and the portfolios underperformed.

The performance of the MSCI Frontier Emerging Markets Index over the past 12 months broadly mirrored that of the larger MSCI Emerging Markets Index, which was down -14.58% for the period. In 2018, a number of factors—including four interest-rate hikes by the U.S. Federal Reserve, a stronger U.S. dollar, a slowdown in China’s economy, and rising geopolitical concerns including U.S.-China trade relations and Brexit—weighed on the economies of both frontier- and emerging-market countries, and as a result, have increased the correlation between them.


With frontier and emerging markets facing a difficult period during the fourth quarter of the year, our holdings were generally not spared.

The Mexican equity market was down sharply during the last quarter of the year, given a stronger U.S. dollar and increasing trade and political tensions. Our holdings in Mexico declined over -23% for the quarter. Grupo Aeroportuario del Sureste S.A.B. de C.V., (known as ASUR), operates airports throughout Mexico, including the Cancun airport. ASUR’s stock was down over -26% for the quarter and was the largest detractor from portfolio performance. ASUR’s stock and the stocks of other holders of government concessions in Mexico have come under pressure after a decision by newly elected president Andrés Manuel López Obrador to scrap a $13 billion airport under construction on the outskirts of Mexico City. The move spooked investors and weighed on the peso, which slipped -4.3% against the dollar during the fourth quarter.

We think these worries are overblown and have found no evidence that Mr. Obrador plans to disrupt the existing concession system in Mexico. In what was widely viewed as a positive development, late in the quarter a majority of bondholders accepted Mexico’s offer to buy back $1.8 billion in debt used to fund the airport’s construction. The peso rose on the news, and shares of ASUR trimmed earlier losses.

Another significant detractor from Mexico was Unifin Financiera S.A.B. de C.V., a market-leading non-bank financial company in an underpenetrated leasing market.

The next-largest country detractor was Brazil, where our holdings saw their stock prices decline. Despite being down over -9% in the fourth quarter, electrical power equipment manufacturer Weg S.A. is a company we have followed for many years, and we remain confident that its international operations have the potential to continue to drive returns. Similarly, Raia Drogasil S.A. operates the leading chain of drug stores in Brazil. The company has struggled with sluggishness in same-store sales as accelerated store additions from other chains increased competitive intensity. Raia Drogasil has been using pricing in order to continue to gain market share. So while investors have been disappointed by the company’s recent short-term results, we are optimistic that Raia Drogasil will see stronger market positioning over the coming quarters.

On a country basis, Vietnam was the portfolios’ third-largest detractor from absolute performance, but our stocks were down far less than their benchmark counterparts, which as a group fell over -11%. Within Vietnam, the largest detractor was HDBank. A slowdown in consumer finance has been taking a bit of a toll on the bank. The other notable detractor in Vietnam was Phu Nhuan Jewelry JSC, operator of a chain of jewelry shops. Phu Nhuan’s stock was down roughly in line with the Vietnamese market.

While most of the frontier and small emerging markets in which the portfolios were invested were broadly negative in the fourth quarter, there were some areas of positive return.

The Philippines was the portfolios’ top-contributing country for the quarter, with the bulk of the contribution coming from Philippine Seven Corp., operator of 7-Eleven stores throughout the country. The most-recent financial report showed that the company had added 270 stores over the 12-month period and that same-store sales had increased. Philippine Seven also benefited from a law that was enacted at the beginning of 2018, which lowered the personal income tax, and an excise tax, which increased the cost of sugar-sweetened beverages, but did not significantly reduce their sales volume. During the quarter, we had several informative interactions with Philippine Seven management, including a meeting in Manila. The meetings helped confirm our confidence in the company’s management quality, business model, and long-term opportunity. Philippine Seven remains one of the largest weights in the portfolios and was the top contributor to performance for the quarter.

While historically we have not had many holdings in South Africa, during the fourth quarter we initiated a position in Clicks Group Ltd., operator of the largest retail pharmacy chain in the country. Though 2018 was considered by many to be one of the toughest consumer markets in South Africa since 2008-09, Clicks was able to continue increasing its market share. The company has a strong relationship with its customers, with 77% of sales originating from its 7.8 million ClubCard loyalty members. In 2018, Clicks increased its store count to 663 and we believe the company could add nearly one third more stores to its current base. Clicks Group was the second-best contributor to portfolio performance in the fourth quarter.

Our only holding in Indonesia, PT Bank Central Asia Tbk, was the third-largest contributor. Indonesia’s largest bank by market value, PT Bank offers both conventional and Shariah-compliant banking services. The company saw its stock price begin moving higher in late October after reporting a 9.9% increase in net profit for the nine months ended September. The stock received an additional boost as improved investor confidence in the Indonesian rupiah sent the currency 3.8% higher against the U.S. dollar during the fourth quarter. The company has been seeing signs of accelerating loan growth despite a sluggish domestic environment.


While frontier- and emerging-market investors know too well that political concerns can drive short-term equity returns, developed-market investors are now seeing similar dynamics affecting global markets more broadly. While the U.S. market has been grappling with political concerns surrounding global trade issues and domestic politics, the United Kingdom has found itself at a crossroads where the politics of a “deal” or “no-deal” Brexit has roiled its currency, the pound, as well as the U.K.’s equity markets. These political issues, as well as higher U.S. interest rates and slowing economic growth, could continue to present risks to global markets, including frontier and small emerging markets.

While there are certainly going to be periods of rough seas ahead, we believe our disciplined investment process will continue to lead us to companies that meet our stringent quality standards and that have the potential to thrive over the long term. Our research-intensive approach gives us confidence that the portfolios are built on a foundation of high-quality businesses. From our vantage point, corrections in frontier and small emerging markets can provide opportunities to buy the stocks of what we deem high-quality companies at even more attractive prices. And as a team, we will continue to work and travel to ensure that we continue to supply the portfolios with what we see as the best companies across frontier and small emerging markets.

Thank you for the opportunity to manage your assets.



*The MSCI Frontier Emerging Markets and MSCI Frontier Markets indexes are free float-adjusted market capitalization indexes designed to measure equity market performance in the global frontier and emerging markets. You cannot invest in these or any indexes.

Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indexes. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties or originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (

Brexit is an abbreviation for “British exit,” which refers to the June 23, 2016 referendum whereby British citizens voted to exit the European Union. The referendum roiled global markets, including currencies, causing the British pound to fall to its lowest level in decades.

Correlation, in the financial world, is a statistical measure of how asset classes, securities, markets, or countries move in relation to each other.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index designed to measure the equity market performance of emerging markets. You cannot invest in this or any index.

This commentary is intended to provide you with information about factors affecting the performance of Wasatch Frontier Emerging Small Countries portfolios during the quarter. References to individual companies should not be construed as recommendations to buy or sell shares in those companies. Wasatch analysts closely monitor the companies held in Frontier Emerging Small Countries portfolios. If a company’s underlying fundamentals or valuation measures change, Wasatch will reevaluate its position and may sell part or all of its holdings.

Past performance is not indicative of future results.