MENA equity markets finished the fourth quarter with returns of 0.7% (S&P Pan Arabian Index Total Return), significantly outperforming the MSCI Emerging Markets Index, which was down 8.0% in the same period. For the full year of 2024, MENA equity markets ended up 6.3%, a slight underperformance relative to the MSCI EM Index which was up 7.5%. Through to the end of 2024, MENA markets outperformed the MSCI EM Index by 43.4% and 17.3% over the last five and three years respectively.

Annual return dispersion among the major MENA markets (at the index level) continued to be high this year. The performance differential between the best (Dubai) and the worst (Qatar) market was 29% in 2024. Interestingly, this has also been the quantum range of returns between best and worst in 2023 and 2022. This high level of dispersion is a particularly desirable feature of investing in the region and one we believe is likely to remain given the composition of listed securities in each market (providing different earnings-factor sensitivities), the presence of domestic capital pools dedicated to each market and, more generally, the relatively low levels of foreign ownership in the region.

MENA equities were put to the test this year as they grappled with an escalation in political risk, lower oil price, high interest rates and incremental supply of shares from initial public and secondary offerings. Our view on this was articulated in our fourth quarter letter of 2023 wherein we described our approach to the Saudi market in particular:

“Since the end of the first quarter of 2023, we have become more vocal about our concern on valuation levels in Saudi. During this period, we’ve seen an increase in geopolitical risk, persistently high interest rates, and lower oil prices. None of those factors seem (for the time being) to temper local and regional investor enthusiasm for Saudi stocks, particularly mid-caps and IPOs. We believe it is prudent to avoid being overly exposed to situations where, by our estimates, investor positioning and expectations are excessively high. While we remain constructive on the quality of the Saudi-based businesses we own and the country’s structural growth story…we enter 2024 with lower exposure to these stocks. The Saudi market is highly dynamic, and we expect there will be opportunities to rebuild our exposure to those stocks throughout year.”

In the same letter, we cited a preference for owning the UAE:

“We are relatively more bullish on the UAE, focusing primarily on banks and quasi-monopoly businesses like utilities and infrastructure. Benign liquidity conditions and strong economic growth favour UAE banks with a solid deposit franchise and strong lending opportunities in 2024.”

Fortunately, that view has largely played out in 2024 (with some exceptions of course), and we now find ourselves in a situation where our relative preference has reversed in favour of Saudi as valuations appear more reasonable. We spoke about this more constructive stance on Saudi in our third quarter letter last year following our trip there in October 2024:

“There are three factors working for the strategy at the moment. Firstly, there are growing profit pools resulting from reforms and demographics which is critical to our investing style – growth. Secondly, in the last two months, the market has begun the long-awaited process of recalibrating its expectations of earnings to levels that we deem realistic and interesting – reasonable valuations. Lastly, the strategy has already begun shifting the portfolio to areas where there is a healthy combination of growth, risk-reward and low investor positioning.”

In other markets, we continue to favour Morocco in the portfolio as it represents one of the best structural economic development and equity stories in emerging markets and certainly the region. While the portfolio in Morocco has experienced some turnover in 2024 (primarily due to an exit of a long-held position in the retail sector), we remain committed to our long-term holding in technology and have expanded the portfolio to include companies in healthcare and financial services.

In Qatar and Kuwait, our statement from last year’s letter remains largely relevant today:

“We remain selective, with growth remaining constrained, though we see potential in Qatar’s liquified natural gas value chain and are more optimistic about Kuwait following the appointment of a reformist royal as the new Emir in late 2023.”

While our optimism on Kuwait may have proven pre-mature, we believe the direction of travel is positive and have continued to build selective exposure over the year, primarily in banks and financial services.

As for Egypt, we expressed an openness to increasing our small ownership last year, subject to the devaluation of currency and a correction of the imbalances in the country’s trade and capital positions.

“Egypt remains a wildcard, with an imminent devaluation likely to be the first step in a long journey towards rebuilding policy credibility with investors. That said, we remain open to increasing our ownership in our preferred Egyptian healthcare and technology businesses if opportunities arise later this year.”

The Central Bank and the government of Egypt did eventually capitulate and devalued the currency from just above 30/USD to 50/USD. The devaluation came two weeks after the government sealed a mega property deal with one of Abu Dhabi’s sovereign wealth funds. As a result, we felt more comfortable with the medium-term outlook for US dollar returns on Egyptian assets and stepped up our exposure to our technology company by way of a discounted block transaction in June last year that so far has proven rewarding for the portfolio.

In conclusion, the region passed a particularly testing year in 2024. The structural story for the region remains sound and we are confident it will underpin a powerful combination of a multi-year growth in earnings and a low equity risk premium relative to emerging markets. While it is too early to determine what happens in 2025, a strong US dollar, stable oil price and a Trump presidency all bode well for MENA equities.

We wish you a prosperous 2025 and look forward to sharing updates on our strategy with you.

The strategy focuses on investing in frontier and emerging market companies that our team expects will benefit from demographic trends, changing consumer behaviour, policy and regulatory reform and technological advancements.

Below, we explore several key factors that influenced returns in 2024 and share observations on the portfolio and the markets.

Internet and technology portfolio

The portfolio’s investments in the internet and technology sector propelled returns in 2024. This was driven by FPT Corporation (FPT), the Vietnamese IT services company, which established a relatively early mover advantage in the AI consultancy space. This placed the company firmly in the AI winner camp in 2024 and led to a re-rating of its shares. FPT also benefited from continued IT capex recovery from its traditional markets in the APAC region as well as strong execution in the US and Europe, which drove a ~30% growth in the company’s global IT services revenue in the nine-month period ending September.

The sector also saw strong contribution from Kenya due to improvement in the macroeconomic environment there. This was reflected in a strong appreciation of the Kenyan Shilling and a lower cost of equity that transmitted favourably into the valuation of Safaricom PLC (SCOM) (which we own primarily for its fintech asset, M-Pesa). We took advantage of the macro-induced rally and reduced our exposure to Safaricom in the first half of 2024.

We were also fortunate to have the opportunity to participate in discounted share sales by the private equity owners of Baltic Classifieds Group PLC (BCG), the leading online classifieds group in the Baltics. This helped the strategy increase its investment in the company at attractive prices. BCG continued to flex its market leadership in auto and real estate classifieds through calculated price increases and the introduction of value-added services which translated to an 18% growth in operating profits in the six-month period ending October.

We experienced a drag in returns from our investment in Allegro.eu S.A. (ALE), the leading Polish online marketplace. Allegro’s management provided relatively downbeat commentary in their guidance with their nine-month report which it attributed primarily to competition from Chinese players (mainly Temu). The stock had already come under pressure from the unexpected resignation of Roy Perticucci from his CEO role, and so the incremental negative news on competition put extra pressure on the stock. Fortunately, we decided to reduce exposure to Allegro following the news of the departure of the CEO but the strategy still experienced a drawdown from the stock’s reaction post the nine-month results. We still have a small position in Allegro as we believe it will weather the current competitive pressures given its dominant position in the Polish online marketplace.

While we made changes to our internet and technology portfolio during the year to reflect relative valuation preferences and make room for new ideas, the sector remains the largest bet in the portfolio entering 2025 (the end-of-year exposure to the sector is equal to the average exposure in the year). The combination of improving macro, evolving consumer habits, benign regulatory environment and strong management execution is likely to drive another year of strong earnings growth in 2025.

Retail portfolio

Retail was the second major contributor to returns in 2024, but contribution was top heavy, with the shares of Philippine Seven Corp (SEVN) and Mr D.I.Y. Group (M) Berhad (MRDIY) in Malaysia generating nearly all the returns. With Seven, the resumption of dividend payments (via a special dividend) after a three-year hiatus proved to be a powerful catalyst that woke the market up to the company’s strong fundamentals and growth prospects (14% growth in EPS in the nine-month period ending September 2024 and one of the fastest growing 7-11 convenience store networks in the region).

Mr D.I.Y. Group’s shares benefited from the anticipation of a recovery in demand from the B40 group of Malaysian households (B40 refers to the bottom 40% income group) and the entry of the company in a 49% joint venture with Chinese retailer KKV, as well as a supportive equity market environment in Malaysia last year.

We took decisive action to reduce exposure to this sector in the second half of last year, emboldened by what we deemed to be full valuations following the rally in our core holdings above, and better opportunities emerging inside and outside the sector.

We also saw some pressure on consumer wallets and increased competitive intensity in some areas of the retail portfolio including in the home improvement and grocery categories which we deemed to be persistent and as such triggered selling of underperformers in the portfolio. One such example is Wilcon Depot Inc. (WLCON), the Philippine’s largest home improvement retailer, which is experiencing significant pressure on sales densities as demand for home renovations appear to have stalled after the post-Covid demand pull.

We also exited our long-held investment in Moroccan grocery retailer Label Vie S.A. (LBV) on a combination of slowing growth and concerns on capital allocation decisions that we deemed would be dilutive to minority shareholders.

While we end the year with exposure that is well below the average exposure in the year for the sector, we are bullish on some of the additions we made to the portfolio in the year in UAE grocery retailing and Indonesian variety retail which we hope we can share more information on in 2025.

Fast moving consumer goods portfolio

Consumer goods were the third largest contributor to returns this year, driven by long-term holdings Philippines’ Century Pacific Food Inc. (CNPF) and Indonesia’s Industri Jamu dan Farmasi Sido Muncul Tbk PT (SIDO), or Sido Muncul. Century Pacific’s consistency in delivering on their guidance of low- to mid-teens yearly growth proved to be extremely valuable this year as most other Philippine consumer companies experienced significant headwinds from lower disposable incomes and commodity price pressures. The consistency in delivering is the result of a diversified portfolio of consumer products (mainly canned seafood and meat, and dairy), an exposure to institutional demand from developed markets (mainly canned marine and coconut water) and the large consumer market in the Philippines. This creates natural hedges in the company’s cost structure and foreign currency exposure.

Sido, the herbal medicine company that we have discussed extensively in the past, emerged from a difficult 2023 with operating income growth of ~29% in the nine months ending September. Sentiment on the shares also benefited from a transaction in which the controlling shareholder Irwan family bought out the full 17% stake of Affinity Equity Partners, a private equity investor that had come to the end of its investment cycle in the company. The transaction was done at a 30% premium to the three-month average price, signalling confidence from the family in the prospects of the business, and removing the overhang on the shares that typically arises with late-stage private equity ownership of public companies in our markets.

We remain highly selective in this sector and continue to see pressure on profit pools due to increasing competitive pressures, changing consumer behaviour, and the rise of new distribution channels that are disrupting the competitive advantage that many leading companies have historically enjoyed.

Healthcare portfolio

Healthcare was the fourth largest contributor to returns in the year driven mainly by Morocco’s Aktidal S.A. (AKT) and Turkey’s Medical Parks – MLP Care (MPARK).

Aktidal listed its shares on the Casablanca stock exchange at the end of 2022 and came back to the market for a follow-on offering (USD100 million) last year as growth exceeded the company’s initial expectations. Management at Aktidal expects its bed capacity to increase 2.5x between 2023 and 2026 as it capitalises on the structural undercapacity in the market and a supportive regulatory environment for private healthcare investments that is leading to quick utilisation ramp-ups and strong unit economics.

We invested in MLP early in 2024 as we started seeing encouraging signals from the Turkish government on its intent to reverse course and pursue market-friendly economic policies. MLP benefited from improving sentiment toward Turkish assets as the country received its first credit rating upgrade in over a decade from Moody’s in July. Fundamentally, MLP has established itself as the market leader with a 40% share in the lucrative top-up insurance segment which is the fastest growing payor group in the Turkish healthcare market. MLP has also been making sensible single-site acquisitions which it is successfully integrating into the network.

We experienced some drag in returns from the sector from investments in Indonesia and Thailand where weak equity market sentiment and pressure on payors (insurers and medical tourists in the case of Thailand) led to a de-rating of our stocks at the end of the year. That being said, our position size in that region is relatively small and we are oriented to be buyers of this weakness as growth drivers around demographics and regulations remain intact.

Outlook

We are constructive on the strategy’s positioning in 2025. While the global market environment is uncertain, we believe earnings visibility from our portfolio companies is relatively high in the next two years. As in every year, we reduced valuation risk when appropriate (reducing exposure to areas where share prices ran ahead of fundamentals), and exited underperforming positions where fundamentals are likely to worsen. Positively, we found many areas to invest in and, as a result, find ourselves with low levels of cash relative to the history of the strategy.

We look forward to updating you on the strategy over the rest of the year.