Fund Manager Notes from Egypt

Earlier this summer our Africa investment team undertook a research trip to Egypt, just over six months since the authorities floated the Egyptian pound and initiated a reform driven agenda.

Since the removal of currency restrictions and the removal of subsidies, which helped Egypt secure a US$ 12bn IMF loan, both its debt and equity markets combined attracted inflows of US$ 7.7bn; US$3.7bn from foreign investors and US$4.0bn from domestic investors. The government also tapped the global capital markets raising US$ 7bn in Eurobonds, and the central bank’s 700bps increase in domestic interest rates attracted more than US$ 13bn into its Treasury Bills. This resulted in Egypt’s reserves reaching over US$ 36bn, covering almost eight months of imports.

These vast efforts by the government have now set the economy up for a recovery.

The purpose of the trip was to enhance our understanding of how the corporate sector was coping with the new environment and assess investment opportunities in the country, which we believe is at the beginning of a new growth cycle.

The following report outlines the team’s findings and prospects for the economy.



Egypt’s government, institutions and economy were in a distressed position as recently as 2016. This led to an IMF intervention, with a USD 12bn bailout package on the condition of a sweeping set of reforms.

The central feature of these measures was the elimination of Egypt’s currency peg, which was clearly unsustainable for a net importer of energy and soft commodities, with a dependency on diaspora transfers and credit markets. In the following period, the country’s exchange rate has therefore been determined by market forces, with the adjustment resulting in a downwards repricing of the Egyptian pound in the order of 50-60%.

Other reforms undertaken by the Egyptian government include the implementation of a transaction tax (VAT) and the passing of a new investment law to cut energy subsidies, the combination of which will improve fiscal revenue. Moreover, the new government is now mostly made up of technocrats, and although institutions remain fragile, the quality of administration is improving.

During our visit, both Domty, a branded cheese producer, and Edita, the largest bakery goods company in the country by market share, told us that they increased the prices of their product to consumers by more than 100% over the past year to compensate for rising input prices and its impact on their cost structure. There is no doubt that the economy is still adjusting to the new exchange rate, and inflation increases are hitting consumer’s disposable income.

The 700bps rate hike by the central bank since November last year (to an 18% deposit rate) is also positive news, which will help anchor inflation and attract portfolio flows to support the currency. This is unlikely to crowd out investment as the economy is underleveraged, with private credit to GDP at 34% at the end of 2016 vs a high of 55% back in 2002.

The Egyptian economy is now stabilising and is no longer distressed; all the companies we talked to were incrementally more confident about the future.



We assess country risk in terms of economic health and institutional and government quality. It is clear that Zuma has been a disastrous leader for South Africa. However, 2017 holds the prospect of change as the ANC are electing a new chairman. So a real prospect of a positive leadership change, alongside a strong central bank could mark the beginning of a reform driven agenda, triggering a return to faster economic grow.



Edita is the leading baked snack food company in Egypt, owning the country’s leading brands in croissants (60% market share), cakes (57%), rusks (47%) and sweets (20%).

We admire how they have built a portfolio of strong brands, whilst managing a business with sound financial metrics. Their ability to adapt to the recent challenging environment of rising cost pressure was illustrated in their marketing strategy, where they introduced volume/value offerings whilst increasing prices overall. The combination resulted in a limited fall in overall sales and minimal impact to profitability. Our visit focused on an assessment of their operational execution at their main bakery manufacturing sites.
It is our judgement that the company’s operations compare favourably with production plants across the emerging and developed world, not least Bimbo, the world’s largest baked goods company, and a holding in our Latin America Fund. Moreover, the facility is run by an impressive management team, all of whom were former global FMCG professionals at firms such as Coke, PepsiCo and P&G. These individuals bring global best practices from the production process to branding strategies and revenue management. This was particularly evident across their manufacturing facilities, which met Western European safety and efficiency standards and benefitted from modern design and technical specifications. The application of these best practices results in Edita having ISO 22000, ISO 9001, ISO 14001 and OHSAS 18001 certifications. Likewise, Edita’s internal communications in terms of corporate values, product branding and health & safety standards were like any other world class operator.



One of our largest investments over the past year was Oriental Weavers, a significant Egyptian exporter of rugs and carpets.

The FX adjustment of 2016 resulted in solid investment returns over the past twelve months, with Oriental Weavers up more than 20% in USD from the beginning of 2016 to our visit in mid-May. This is in comparison to MSCI Egypt, which was down 10.1% over the same period.

Over the course of our visit we were impressed by the mind set of constant improvement in their manufacturing processes. For example, we took a tour of Oriental Weavers’ weaving facility, where we saw their newest generation of manufacturing technology in action, and software which they co-developed to deliver one of the highest productivity weaving machines in the world. These developments were driven by a need to keep pace with client requirements (firms such as IKEA, Lowe’s, Target and Intercontinental hotels) and international competitors.

Oriental Weavers’ net income rose 128% YOY in Q1 2017, as its export-business flourished (dually boosted by recovering volumes and a weaker Egyptian Pound), while its local margins were protected by price increases. It is also worth mentioning their brand new state-of-the-art storage warehouse. Using the latest software and hardware technology for triage, storage and management, they have increased capacity by up to 50%. This makes Oriental Weavers the world’s largest carpet producer with no human intervention, with one of the lowest error rates in the world in their warehouse management supply chain.



The third bucket of companies we met during our trip were domestic leaders in its booming food and healthcare sectors. The past year severely impacted domestic consumption, a market which was recovering from a tough environment since the Arab Spring. However, looking beyond the economic adjustment, we believe these companies offer one of the more compelling growth opportunities globally.

Egypt has tremendous potential due to its demographics and economic informality. Egypt is a country of nearly 95m people, with a median age under 25 yrs, 2% annual population growth, and 85% of small & medium sized classed as informal. Its young and growing population has the potential to provide years of consumption growth for branded food companies, and a sound economic reform plan can accelerate the formalisation of the economy, thereby broadening the tax base and improving the country’s fiscal accounts.
Beyond the consumer industry, we met with health care companies such as Cleopatra, a hospital operator, and IDHC, a diagnostics company. Both have international expansion aspirations, which bring opportunity and complexity. In our view, we believe the domestic opportunity is large enough for them to focus their attention, as an international venture adds risk to their business with lower synergies and potentially greater execution risk.



There is no better way to evaluate Environmental, Social and Governance (ESG) factors than on the ground research.

The ESG standards of the companies we visited met our minimum requirements to be investable. Indeed, a number showed evidence of global best practice and quality. This is, of course, a reflection of our pre-selection, and doesn’t represent the overall assessment of ESG in Egypt. In general, we find transparency to be extremely limited, with a great deal of engagement required to gain sufficient insight.

Edita most impressed us with respect to its standards of ESG. Their industrial bakery met global best practice in terms of quality of industrial machinery, quality control, hygiene, health and safety standards and staff professionalism. In addition, they displayed consistent evidence of innovation via which they increased productivity and created cost savings, while decreasing their environmental footprint. This was apparent by the implementation of a new wafer line, which helped new product introduction, whilst at the same time increasing productivity, lowering costs, and reducing waste.
Elsewhere, companies like Domty, Egypt’s leading branded cheese producer, showed a desire to improve their ESG adherence and will benefit from the support of Tetra Pak in their endeavours. They showed us their brand-new facility, which was in the final stages of construction and geared towards greater production scale and energy efficiency.

We focused on understanding the extent to which the firm had a culture of energy saving, health and safety initiatives and food safety standards. Their brand new manufacturing facility was designed with Northern European specifications, with particular regard to industrial engineering flow and waste reduction. We shared our experiences of other production facilities in France and Mexico, specifically regarding Health & Safety communication and implementation procedures. This was not visible to us during our visit compared to its wide visibility in facilities we’ve seen elsewhere. Domty’s management assured us that this is being taken on board.



Overall, we returned with an extremely constructive view on Egypt, a country implementing the IMF’s reform driven agenda, an agenda embraced by the private sector and well understood by the ‘man on the street’. The companies we met with were well prepared for tough times, and are even better prepared for the next growth cycle, which we believe is ahead of us driven by the execution of a well-structured reform programme designed to reduce the fiscal budget and decrease inflation. The next economic cycle has the potential to generate significant returns for investors.

The Egyptian market is trading at rock-bottom valuations and incremental FX risk is now limited due to a 700bps hike in interest rates. This is to say, the Egyptian Pound devaluation is now behind us, with growing portfolio inflows since November 2016.

As the country’s institutional and macro-economic frameworks stabilise, it is easy to imagine international investors getting excited again about Egypt over the next few quarters, and as such, there could be strong tailwinds for our holdings. With a 90m, young population that is growing rapidly, only a few economic improvements are necessary to unleash foreign and domestic investment, as well as triggering a boom of consumption led by a growing middle-class.

Investment Process in Action: Asia

As our Senior Analyst, Aaron Armstrong, returns from his most recent investment trip, he reports back on the findings from his visits within the region.

Our investment process is based upon meeting holdings at least twice annually and visiting the regions to see first hand how the economies are developing.  After extensive preparation, I spent 3 weeks visiting 68 companies, of which 13 are current holdings in our Asia Fund.



Thailand was a key country for this trip. When we launched the fund, Thailand was facing twin challenges of uncertainty over the health of the king and political instability. Following the King’s passing in October 2016, the relatively smooth transition process, and a reduction in political noise, we have become more positive on the market.

In addition, I wanted to assess the business environment in the Philippines.  Since the arrival of President Duterte the focus has been on his crusade against crime and his controversial foreign policy repositioning with regards to the China and the USA. Duterte’s credibility as a leader capable of generating economic change was strengthened by the recent passing of an important tax reform bill in parliament, which will increase after-tax income for 98% of salaried workers. This was a key discussion point for meetings with companies exposed to the mass-market consumer segment.

Having spent time in both countries, there appears to be an interesting parallel emerging between Indonesia and the Philippines. Both countries recently elected presidents whose economic agendas and ability to execute them have faced heavy criticism, both elected candidates from outside the normal political circles, and both are now pursuing economic policies relying heavily on infrastructure investment. The only difference being that Indonesia is two years further ahead in the political cycle, with Jokowi three years in to his term in office versus Duterte, who has just completed his first year.

Source: CIA World Factbook
Source: CIA World Factbook



Our process seeks out companies well placed to take advantage of the long-term growth drivers in the region, such as demographics, as well as cyclical tailwinds from economic reform.

In the Philippines, I met our three holdings PureGold Price Club, a mass-market grocery retailer, Concepcion Industrial, an air conditioning manufacturer and Metropolitan Bank, one of the country’s largest lenders. All three had a positive outlook for the economy.


PureGold Price Club are the market leader and we see the tax reform increasing disposable income and so they should be a major beneficiary. They also operate a membership-shopping format, offering higher priced and imported goods to upper-middle class consumers. A critical component for us is their stronger corporate governance than competitors, which gives us further conviction in the investment case. Puregold is currently a holding in the Alquity Asia and Alquity Future World Funds.


Concepcion Industrial are a manufacturer of air-conditioning equipment and the domestic market leader. Competing with international players such as LG, Concepcion have grown their business by developing new revenue streams. For example, by linking up with Otis (elevator supplier) they are now offering “integrated building solutions” at the design stage of new building projects. They are also developing a consumer appliance offering under a licensing agreement with a global brand.


By meeting the companies and seeing their operations, I was able to gain a deeper understanding of both their capability and alignment of values, which are critical outcomes from our forward-looking ESG analysis. Interestingly, during the trip, there was major media coverage of a well known, large blue-chip Thai company, whose Chairman had been arrested following concerns about the firm’s unusual capital structure. The stock, owned by many international investors is a reminder of the need for thorough analysis of material non-financial factors.



I met 55 companies during my trip that are either on our watch list of future potential investments or as a cross check for our existing holdings. We often track companies for an extended period of time before investing, developing our investment thesis and ensuring we have transparency about the business and confidence in the capability and alignment of the management team.
From this trip, the potential new investment ideas that stood out were an Indonesian food company and two Taiwanese producers of health food products. We will continue to track the performance of these companies and conduct deeper analysis, before any potential additions to the portfolio.


Overall, this was a largely positive trip whereby both at the macro and stock level, for the majority of cases, I came away more optimistic on the current investment outlook. We maintain a high level of conviction in the investment case for the Asian region over the coming three to five years, and the findings of my trip have only added to our convictions.

China Week 2016: What’s Inside the Fortune Cookie?

Invented somewhere between San Francisco and Los Angeles, no western Chinese meal can end without the now ubiquitous fortune cookie. So far, we have shared why the Chinese economy will continue to grow and the sectors that will drive that growth. It’s now time for us to break open our fortune cookies and show you the best investment opportunities for the future.


Cookie 1: You will have a long and healthy life

A decade ago the Shanghai marathon struggled to get any entrants. Last year over 100,000 people entered the lottery for the 23,000 starter places[1]. At the same time, football attendances in the Chinese Super League have doubled[2]. A perfect score for Pou Sheng, a distributor for Nike and Adidas in mainland China. A good quality management team with excellent ESG (Environmental, Social and Governance) credentials, Pou Sheng has been in our Asia Fund since December 2015, delivering returns of 58% during that time.


Cookie 2: You will be famous

The big screen beckons for the Chinese as cinema screen numbers have grown from just over 2000 in 2004 to an estimated 45,000 by 2017[3].  This has not gone unnoticed, in particular by IMAX, the Canadian company behind the world famous premium cinema format. Their local subsidiary IMAX China, which listed on the Hong Kong stock exchange in 2015, benefits from strong western standard corporate governance including a good level of independence on the board of directors. Their latest laser-based, digital projection equipment uses less energy than traditional alternatives and they have excellent heath and safety policies covering installation staff. In our fund since November 2015, we’re in the box seat to take advantage of this blockbuster.


Cookie 3: You will travel to seek your fortune:

The changes in the Chinese economy presents great opportunities across the whole of Asia. We are already seeing the shift of low cost manufacturing activity to new growth hotspots like Vietnam and Indonesia. Our Asia Fund with over 30% in frontier Asia takes advantage of this trend to capture the second order effects from the rebalancing of the Chinese economy.

Honed over decades of investing in Asia, our investment process which incorporates material non-financial factors into the analysis, helps us to identify the winners before our peers. Whilst not quite fortune cookies, we’re confident our investments will leave a sweet taste in your mouth.






China Week 2016: the Great Chinese Rebalancing Act

Just like the gravity defying acrobats in the Chinese State Circus, the Chinese economy is performing a rebalancing act that requires a bold vision and policy dexterity.

Momentum behind the rebalancing process has been slowly building since President Xi Jinping took office in late 2012, though with typical opaqueness from the Chinese government.

In August 2015, a drop in the currency and heightened expectation of devaluation led to global investor panic and in January 2016 the fall in the Purchasing Managers Index (PMI) to below 50, indicating a contraction in activity, had a similar irrational response. We looked through these headlines and saw the services and consumer data was strong and improving. We also expected the government to respond and support the teetering economy. Duly, they did by launching the largest programme of fiscal stimulus since the Global Financial Crisis and provided monetary stimulus through interest rate reduction and by lowering the reserve requirement ratio for banks to encourage lending.

Today, few investors expect a hard landing, and the repricing of this risk is a key factor in driving equity market returns across the region. Over the summer we saw industrial profits up 11% YOY, power consumption up 9% YOY and property sales in August up 25%. With industrial inventory, including steel, shrinking (suggesting lower excess capacity and improving utilisation rates), many indicators are pointing towards a period of relative stability for China’s economy, versus the expectations for an imminent collapse that have twice gripped markets over the last 14 months.

The great re-balancing act will leave behind those investors unable to adapt. We continue to search for exciting new opportunities as the economy moves away from an export focus to domestic consumption and increasing urbanisation. At just 55%, China has the same urbanisation as Japan in the 1950s and the US in the 1920s. So from the unloved property sector to designer sportswear, we’re finding great “next story” companies tapping growth opportunities in ‘New China’- the greatest show on earth.

China Week 2016: From Noodles to Popcorn

In 2005, scientists discovered a 4,000 year old bowl of noodles- the earliest example ever found. This quintessentially Chinese dish has been the staple ingredient in the Chinese diet for millennia, but have the Chinese finally fallen out of love with the noodle? Last year, instant noodle sales were down 6.8% versus the previous year despite several years of growth prior to this. While it would take big chopsticks to forecast the end of the noodle, does this indicate a more subtle change in Chinese tastes?

With growing wealth comes choice and we are beginning to see across a variety of consumer products that Chinese tastes are moving away from staples (even cheap beer sales were down 3.5% YOY last year) to more discretionary spending on products and services such as sportswear and cinema. In fact, China is now the most important market for Nike and Adidas outside the US. You also need somewhere to show off your new trainers and last year the Chinese box office grew over 48% to be worth a huge US$6.8bn.

Rising incomes in China have also led to a shift  of low end manufacturing to other countries in the region such as Vietnam. Here, the rise in Foreign Direct Investment (FDI) as companies invest in more capacity has driven an increase in living standards and associated consumption. Our stocks such as Vinamilk (dairy products) and Masan (fish sauce) are well positioned to benefit. With 15% in Vietnam, our Asia Fund has the highest allocation to the Vietnam growth story amongst our peers.

So while  noodles will still be on the menu across Asia, you are increasingly likely to see the Chinese reaching for popcorn with their chopsticks whilst wearing 3D glasses.