E Don't Cry For Me, Argentina

My willingness to deal with Argentine risks does not extend to yield funds. So I used a magnifying glass to examine the holdings of beaten-down closed-end Templeton Emerging Markets Income Fund, TEI, which has as its lead portfolio manager the notorious Michael Hasenstab Ph.D, the man who loaded up Templeton funds with the 100-year Argentina debt issue early this year. The most recent TEI report has just hit, dated June 30, and I think Hasenstab (who in a touch of irony is Australian and has greatly shorted the A$) has been ring-fenced by our fund. While the full details of currency and interest swaps and forward currency contracts are not easy to find, total local currency exposure to Argentina was cited already then as having hurt TEI performance in H1 and hopefully cut. The heaviest Latin America exposure in our fund was not the Argentine peso, but the Mexican one, accounting for 14.7% of currency risk. Argentina was down the list at 4.9%, in 4th place.

Obviously I would prefer that this was not the case, but note that the main cause of this exposure was from derivatives. Actual Argentina bonds accounted for only 3.7% of exposure at H1's end. At some point even the Hasenstab team would have cut back on derivatives.

The Argentina bonds owned did not include the 100-year issue. Instead it was 3 Bonos del Tesoro (Treasury bonds): $11.1 million in the 15.5% of Oct. 2026; $6.2 million in the 18.2% of Oct. 2021; and $2.99 million in the 16% of Oct. 2023. An additional $6.5 million was held in short term stripped Letras del Banco Central of Argentina maturing between July 18 and Nov. 11 of this year.

The key question is whether the Board of Directors of our fund, who are less than independent since most of them sit on the boards of dozens of Templeton CEFs, in any way tried to keep Dr. Hasenstab from continuing his folly.

I am optimistic if only because for the past weeks, a key TEI stockholder, Saba Capital Management LP, which owns about 10% of the shares out, has been selling about a million shares per week. Our fund has been underperforming in NAV terms for the past year and the market price has not reflected this underperformance.

To be on the safe side, sell half your TEI now at $9.86, taking a loss.

Our worst hit share today is Anhaueser-Busch-Inbev, BUD, now a Belgian brewer which earns about 60% of its before-tax income in emerging markets, like Argentina, Brazil, and South Africa. BUD borrowed heavily to grab SAB Miller, HQ'din South Africa. Nik Oliver of UBS says the risk is high but also thinks in the longer-term, inflation will offset the forex pressure. BUD lost 5.5% this week.

Tech & Tel

Germany's SAP (sold) is under investigation for alleged bribery to win a deal with the South African water ministry under the Jacob Zuma government. We sold when rumors hit my desk which I could not publish without getting sued. Under new President Cyril Ramaphosa, the anti-graft agency is looking into the $44 million SAP deal.

Tencent will apply a system of pre-long-on identification for Chinese players of on-line games to stop kiddie addiction.

It also signed up UK social video distribution firm Brave Bison plc to make videos for WeChat messaging, payments, and chat. Its plan to help list Qutoutiao ADRs at $7-9 next week may be delayed because JD.com, a potential backer of the IPO, is under pressure because its CEO is accused of rape. It was supposed to buy $40 million of the new shares, four of which equal a Chinese one. QTT would be the ticker symbol of the content aggregator which offers news to Chinese websites. I think this is a non-starter given the problems of Chinese censorship and would not buy. TCEHF in Hong Kong is down 6.6% yesterday and a further 4.1% today at HK$318 and here under $40/sh for the first time in a year.

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