Well begun is half done
MENA – Middle East, North Africa
The Determined MENA portfolio reported strong 15% returns in 2Q23 (Feb-June23). This compares with the Nifty MidSmallcap 400 Index benchmark, which also reported strong 12% returns during this period. Since this the first quarter since launch of the portfolio, cumulative/ since launch performance is similar. The portfolio performance is driven a lot by Beta (or very strong correlation with the market). The Alpha (outperformance, or underperformance, vs the market) has honestly been very limited (3%). But a nice change from the range-bound markets for a good 15-18 months (since Sep21 really) – if we were a little lucky in terms of timing, so be it, and we will take it. Our luck is also reflected in the decent but below average financial metrics (Figure 2) – 12% yoy profit growth is nothing to crow about. We have always maintained that earnings of companies drive returns/ performance of respective stocks/ equity – this was on show in the portfolio returns driven by 3-4 stocks (out of 12) that delivered stellar earnings/ growth, and their stock prices also responded in an equally stellar fashion. There is plenty of time for the remaining stocks in our portfolio to deliver earnings/ growth and correspondingly, returns.
That said, a warning! The MENA thematic portfolio is primarily a play on the Energy upcycle. As it is, India is limited producer of Energy and ends up importing majority of its requirements. The limited production that does happen and the companies that deliver it, are mired in an impossible labyrinth of needless regulations. Hence the portfolio. But what if the principal assumption, that of an Energy upcycle, itself fails. Recently we have seen global Energy prices (Crude Oil as well as Natural Gas) moderate – the widely expected EU Energy Crisis has failed to materialize (but we knew that already). Well, commodity prices are volatile and up-downs are to be expected – what remains unchanged is our core thesis that the world is not investing enough in producing Energy (specifically of the Oil & Gas variety) to meet demand over the next few years. That Crude Oil prices are also holding at historically high levels of US$70-80 (as opposed to going down to US$40-50 pre-Covid normal levels) also supports are thesis. Hence, 2-3 quarters of weak Energy prices and MENA portfolio returns would not bother us – we are here for 2-3 years. Yet we had also forewarned in one of our launch writeups – ‘dont forget India’. Further, our MENA portfolio companies exports (~30% share of sales) are almost double of just their MENA exports (~15% share). India’s exports took a knock last year (FY23) on account of elevated freight/ container costs – that position has reversed sharply, supporting exporters.
Determined investments 