RDR Capital 3Q17 portfolio update (+2.5% YTD, +18.9% since inception)

RDR Capital’s MENA portfolio is up 2.5% in the first nine months of 2017 (9m17) and up 18.9% since inception (the portfolio was incepted on the 1st of October 2016). Our global portfolio is down 1.5% in 9m17 in GBP terms (up 7.4% in USD terms) and since inception (the portfolio was incepted on the 1st of January 2017).

Geopolitics weighed on the MENA portfolio’s performance during the third quarter of 2017

The Middle East and North Africa (MENA) portfolio was under pressure during the third quarter of 2017 (3Q17) mainly due to the geopolitical crisis in the gulf region between Qatar on one side and a Saudi-led coalition that includes the UAE, Egypt and Bahrain on the other. The coalition imposed a land, sea and air embargo on Qatar. The crisis has put negative pressure on regional markets, especially the Qatari market, as liquidity exited. The International Monetary Fund (IMF) cut its non-hydrocarbon growth forecast for the Qatari economy in 2017 from 5.7% to 4.6%. It is reasonable to expect confidence to weaken and investment to drop the longer this crisis continues.

As a result of the above, we sold our entire investment position in Doha Bank during the quarter. The crisis will have a negative impact on the economic performance of the Qatari economy, as mentioned above, despite Qatar’s immense wealth. This will most likely put pressure on consumer confidence, especially on non-Qatari residents. That will in turn have a negative impact on, especially, the retail component of local banks revenues. Doha Bank has a relatively large exposure to retail customers in Qatar and as such we expect the bank’s revenues to be negatively impacted by the crisis in the short and medium terms. In addition, the bank’s funding costs are rising, which will put pressure on margins, and loan growth is expected to slow significantly. It is also reasonable to expect an increase in non-performing loans (NPLs) across the Qatari banking sector, negatively impacting earnings in the medium term.

Almarai was under pressure during the quarter on the news that Savola was selling a 2% stake in the company, reducing its holding from 36.52% to 34.52%. The sale should have been a non-event as Almarai’s shares are liquid. However, we believe that the market is now expecting Savola to continue selling some or all of its remaining stake in Almarai over the medium term, putting negative pressure on the share price. Savola sold 16m shares at SAR70 per share. We sold half of our position in Almarai at SAR96 on the 17th of June on valuation concerns. We will continue to hold the other half as our positive view of the fundamentals of Almarai has not changed. We will monitor Almarai’s share price going forward for interesting levels at which we would add to our current position.

Challenging quarter for the global portfolio

It has been a challenging quarter for our global portfolio mainly due to the strength of the pound sterling (GBP), especially versus the US dollar (USD). This can be clearly seen in the divergence of the portfolio’s performance in USD terms vs in GBP terms. The global portfolio was slightly supported by our long volatility and leveraged short positions during the quarter, which we have now sold. These positions were c2.5% of the portfolio.

We initiated a position in Hikma during the quarter. Hikam is a generic drug manufacturer that operates globally but with significant exposure to the growing MENA markets. Hikma’s share price has dropped significantly in the last two quarters due to concerns of a challenging environment for its generics business, its second largest behind injectables, especially in the US. It is our view that the market has overreacted to the negative news and that Hikma’s shares look attractive at current levels.

In addition, we added to our position in Reckitt Benckiser, now our largest holding. Reckitt remains a well-run market leader with strong and established brands well positioned for growth despite what we view as transitory issues that include the cyber attack the company suffered from and the exit of 4 senior managers during the quarter.

Final thoughts

The global markets remain challenging for our style of investing, but we will persevere in unearthing interesting long term investing opportunities through our research based fundamental process.