Milltrust GEMS Fund Investor Communication: Fund Update Amidst COVID 19 and Looking Forward

March 18, 2020

BY Milltrust International Group

As COVID-19 continues to spread, we want to assure you that Milltrust International, its affiliates have a comprehensive, regularly tested, Business Continuity Plan to ensure that the interests of our clients and our employees will continue to be served in events such as this.  We can confirm that our operations and those of our underlying investment teams are still operating at full capacity. We will continue to take all necessary steps as the situation unfolds to safeguard the interests of our investors and employees and we will notify you of any changes.

As the contagion of COVID 19 and the correlated economic dislocation picks up pace throughout Europe and North America, signs that the virus has, for now at least, peaked and been contained in China, Hong Kong, Singapore, Taiwan and Korea points to the probability that Asia will be the key driver for the eventual recovery of the world economy. The boosting of domestic consumption is also key to China’s plans to resume the workings of the mainland’s twin levers of supply and demand, with designs and policies afoot to redirect the circa US$300 billion from the outgoing tourism industry back towards more sustainable domestic consumption, which should benefit a number of our investments.

With the contributions from our local specialist investment teams, we have compiled the following market updates:


  • We are of the view that the resurrection of suppressed consumption is very likely to follow a very sharp V-shaped trajectory soon after the nationwide COVID-19 alert is lifted. This is in stark contrast to consensus expectations of a slow and gradual recovery of consumption. Our conviction comes from both referring to how events unfolded over the SARS period as well as our on-the-ground channel checks. According to a report by Bain & Co, many consumer sub-categories observed a sharp rebound in 3Q03 after SARS. In particular, small-ticket items (such as apparel & footwear and food & beverage) experienced the strongest recovery with quarter-over-quarter sequential growth improvement ranging from 800-1300 bps. Our on-the-ground channel checks also suggested average Chinese consumers are willing to step up their spending once the government lowers restrictions on travel and social activities. We believe China’s retail sales will show a significant month-over-month rebound in March and April. The delayed “back-to-school” spending for Chinese students could provide additional fuel to the recovery.
  • We believe the broad consumer space will see a negative impact on financials for 1H20, due to softer sales growth, increased expenses on discounting and promotion, and some inventory and recoverable provisions. However, we believe investors are sanguine enough to look through these as short-term noise. We expect a normalized 2H20 for most of our portfolio companies on both revenue growth and profitability. We firmly believe that, when we are fully past the COVID-19 crisis, Chinese consumer equities will very likely outperform the overall market.


  • We are increasing our exposure to names correlated to the Brazilian economy (like Magazine Luiza and Cogna) and also commodity names that aren’t linked to infrastructure investments in the world, like the pulp and paper sector. We are not worried about this drop at the moment, we saw a similar move in the Brazilian markets in 2018 with the Truck Drivers Strike and it proved to be temporary.
  • We are still very bullish about Brazilian equities in the long run, and we believe some reforms will still be approved this year with the possibility of the investors regaining focus in the Brazilian “micro” story as opposed to the all-out bloodshed we are seeing now. Our economy still has a lot of room to grow, a big unemployment buffer and all-time low interest rates.   We expect Brazil to continue to have a cyclical recovery, it will be different in relation to the growth of the rest of the world.


  • The valuations in India have receded to the long-term average in terms of P/E and below long term average (closer to -1 standard deviation) in terms of P/B multiples. The yield gap between earnings yield and bond yield has also turned positive which indicates attractive valuations.
  • Over the past fifteen years, whenever this yield gap has turned positive, the returns over the next 12 months have been significantly positive; in a range between 20 – 40% and we believe the same can play out this time as well. We look at the current correction as an attractive opportunity for investors to take exposure for the long term to partake in India’s growth potential. We will continue to accumulate high-quality companies in the portfolio which are now available at a significant discount to their recent valuations.


  • Coronavirus is giving us the opportunity to buy structural growth stocks at a reasonable price. The number of tech companies in Korea including non-memory semiconductor, foldable display, fin-tech, etc, has been increasing considerably in the market. Valuation has been an issue, but the share prices have come down to attractive levels. There are also businesses that are relatively solid or will benefit from the current situation; online shopping, as an example, has grown exponentially; telework has started to become wide-spread, and telemedicine, which used to be difficult to implement due to the strong opposition from the existing medical system, have also begun to operate. We believe the virus will result in the earlier-than-anticipated implementation of the new technological advancements.
  • We expect Korea, as an export-driven economy, will likely enjoy a strong bounce-back during the market normalization once global trades start to recover. Korea also has the potential to improve corporate governance structure through adaptation of stewardship code which will catalyze re-valuation.

South-East Asia

  • We see varying degrees of public policy responses in ASEAN: while the sufficiency of responses in Indonesia and Thailand remains to be seen, the recently announced lockdowns in Malaysia and the Philippines have been significant steps taken to contain the spread.
  • Valuations regionally, in terms of P/B multiples, are now below 20-year averages: Indonesia is trading below -2 std dev (near GFC low), Malaysia is below -1 std dev (slightly below GFC low but above AFC low), Philippines is below GFC low, Thailand nears -2 std dev, while Singapore is at -2 std dev (12-year).  With such market developments, running traditional screens suggests several quality names trading at appealing valuations – although we are mindful of the risks to perceived data-dependent decisions posed by the fluidity of scenarios, we believe this presents many fresh opportunities to be selectively taken advantage of.


  • After the recent market corrections, the Russian market is currently trading at a very cheap 5.1x P/E, while offering an incredibly high dividend yield of 11.0% for 2020.
  • Russia is arguably in a more comfortable position versus the other oil producers.  Russian oil companies are amongst the lowers cost producers in the world, with all-in costs of USD 12-14 per barrel of oil.  Furthermore, Russia has a flexible exchange rate, with the ruble tending to move broadly in line with the terms of trade. Higher commodity prices tend to result in a stronger ruble and vice versa. The social impact is different from Saudi Arabia’s, as the Russian economy is more diversified and most ordinary consumer goods are produced in Russia.  A lower oil price and a weaker ruble will lead to some uptick in inflation, but largely on higher-end and discretionary goods.

Asia (Climate Impact Theme)

  • The unique climate impact investment strategy, focusing on companies that derive at least 50% of revenues and/or 50% earnings derived from the low carbon environmental goods and services sector, has proven relatively resilient during the ongoing turmoil.
  • The Chinese low carbon names have begun to announce FY 19 earnings, with encouraging results and outlooks being already reported (March 16th) by our coal to gas play, and our photovoltaic solar and glass manufacturer which declared a sustainable 100% payout ratio of earnings translating into a final dividend which represented a yield of 6.5%.  We have targeted investments in the new energy vehicle, green consumer staples and low carbon utility sectors once clear evidence appears of an end to the ongoing rout in global markets.

As per our track record, our Milltrust Global Emerging Markets portfolio typically only captures 70-75% of the downside of the main indices and this remains in line with our performance year-to-date as the EM markets approach a 30% loss for the first quarter of 2020.  An important rule of thumb during these times of heightened volatility and investor panic is it to ensure that investors stick with high-quality names which is a key focus for our strategy.

Click here to read a message from Milltrust CEO’s on his views on COVID-19.
Click here to read an update on our Climate Impact Asia Fund amidst COVID-19.

Should you have any questions or concerns, please do not hesitate to contact us on [email protected].

Eric Anderson
Managing Partner – Milltrust International LLP
Portfolio Manager – Milltrust Global Emerging Markets Fund