We identified compelling investment opportunities in Kenya and Egypt. We further reduced our overweight exposure to Sri Lanka and Saudi Arabia. On a sector basis, we made some changes within financials.

Kenya and Egypt

We identified a number of what we believe are compelling investment opportunities in some of the smaller frontier markets, such as Kenya and Egypt.

• We continued building a position in Safaricom, Kenya's leading mobile operator. Service revenue growth remains positive, and the company is benefiting from growth in mobile data and the ongoing take-up of M-Pesa, a messaging, payments, and microfinancing app, across the country. We expect additional upside for the stock from the M-Pesa rollout into Africa (with Vodacom) and a special dividend in 2021.
• We initiated a position in Egyptian digital payment business Fawry. Fawry's digital payments business in volume terms exceeds all the other competition combined. This part state-owned payments platform is core to over 26 million consumers wishing to pay for airtime and government bills through a large merchant network. While the core is still growing at a high growth rate, it is the new, higher-margin supply chain, banking services, and microfinance services that are accelerating bottom-line growth. After the pandemic is over, we expect digital payments to continue accelerating in Egypt.

Sri Lanka

Over the course of the second quarter of 2020, we reduced our overweight position in Sri Lanka, and in the third quarter, we continued this shift.

�

We sold down our position in Ceylon Cold Stores, a Sri Lankan consumer staples group that manufactures and sells carbonated soft drinks and frozen confectionery food products. The pandemic has been extremely damaging to Sri Lanka's economy. The country entered this crisis with an already very high debt-to-GDP ratio and significant costs of servicing that debt. While the company's long-term outlook remains promising in its underpenetrated segments (ice cream, beverages, and grocery retail), the pandemic is proving to be a bigger-than-expected headwind to its supposed defensive categories due to the severe lockdown in Sri Lanka.

Saudi Arabia

We have a modest overweight position in Saudi Arabia, and over the course of the quarter, we slightly reduced the extent of our exposure, largely due to stock-specific reasons. For example, we reduced our holding in hospital group Al Mouwasat Medical, in part due to profit taking as valuations began to look full. Over the near term, the challenging macroeconomic backdrop is expected to be a headwind, and opening costs of new hospitals are likely to weigh on profits. Looking further ahead, we believe the company is well positioned to continue gaining market share as expansion projects are completed.

Financials

As the third quarter began, the portfolio had a significant overweight in financials names, and over the course of the review period, we adjusted this exposure. For example, we increased the size of our existing holding in Bank of Georgia and, to a lesser extent, in Bangladesh-based BRAC Bank. These purchases were partially funded through reducing our exposure to a couple of Kuwait-based financials names.

• We topped up our position in Bank of Georgia. The country has managed to keep the spread of COVID-19, the disease caused by the coronavirus, fairly contained, and government stimulus should help to support the economy through this challenging period. Looking further ahead, tourism could be a source of upside, after being written down completely in 2020. We believe that the stock's valuation offers upside potential and several factors may boost the stock. In the medium term, efficiency gains may result from the digital push the bank has pursued as a result of the pandemic.
• We took some profits in National Bank of Kuwait ahead of Kuwait's upgrade to emerging markets status by MSCI. The bank remains a very strong and defensively positioned franchise for this environment; however, we are likely to see ROE contraction in 2020 and 2021. We see the longer-term potential for this high-quality franchise, which continues to gain market share.
• We continued to further reduce our position in Kuwait Finance House, again partly due to the upcoming migration of Kuwait to the MSCI Emerging Markets index. Over the period, there was speculation that the planned merger with Bahrain's Ahli United Bank was back on track. This was previously delayed on account of government measures to contain the spread of the coronavirus. As with other banks in the region, the combination of the COVID-19 pandemic and lower oil prices is likely to weigh on the stock in the near term.

Materials

Although the portfolio retained an overall underweight position in materials over the course of the review period, we raised our exposure to Kaz Minerals, the copper producer that owns assets located in Kazakhstan. The company stands to benefit from a rising price of copper. This should be supported by both growing demand from China as manufacturing picks up and reduced production in Chile. The company's half-year results were broadly in line with expectations and key projects remain on track.