SJB Substanz: New Capital Asia Future Leaders Fund (WKN A2PFKL) Monatsbericht Februar 2023

Chris Chan, FondsManager des New Capital Asia Future Leaders Fund

SJB | Korschenbroich, 24.03.2023.

Die asiatischen Märkte gaben im Februar um 6,8 Prozent nach und entwickelten sich damit schwächer als die USA und Europa. Während in Hongkong nach der vorangegangenen dreimonatigen Rally Investoren zu Gewinnmitnahmen neigten, konnten Taiwan und Indien outperformen. In diesem wechselhaften Marktumfeld verzeichnete der New Capital Asia Future Leaders Fund USD I Acc (WKN A2PFKL, ISIN IE00BGSXT619) eine Performance von -6,53 Prozent und entwickelte sich besser als seine Benchmark. In seinem aktuellen Monatsbericht für Februar analysiert EFG-FondsManager Chris Chan die jüngsten Marktentwicklungen und gibt Auskunft über Performance und Portfoliostruktur seines Asienfonds, der sich auf zukünftige Gewinner und Marktführer spezialisiert hat.

Key events in market
Asia markets were down 6.82% in February, underperforming US and European markets. Hong Kong listed stocks dragged the market down as profits were taken post the strong prior three month rally amidst heightened geopolitics newsflow. Growth stocks underperformed 1% in the month with high dividend areas performing well such as IT, Energy, Materials and Financials at the expense of Consumer Discretionary. Taiwan and India outperformed whilst the China A share market outperformed Hong Kong.

Key performance & positioning updates
The Fund was up 29bps vs. the benchmark (MSCI Asia ex Japan) during February. Excluding cash, country allocation was slightly positive with our overweight in outperforming the China A share market helping, despite our small underweight in better performing Taiwan and India. Sector selection was negative ex cash due to our biggest sector overweight in Consumer Discretionary hurting performance being one of the weakest performing areas.

Market Update
Asia markets were down 6.82% in February, underperforming US and European markets. Hong Kong listed stocks dragged the market down as profits were taken post the strong prior three month rally amidst heightened geopolitics newsflow. Growth stocks underperformed 1% in the month with high dividend areas performing well such as IT, Energy, Materials and Financials at the expense of Consumer Discretionary. Taiwan and India outperformed whilst the China A share market outperformed Hong Kong.

China continued their re-opening momentum across many segments in February, particularly helped by post-Chinese New Year pent up demand and resumption of construction projects. Mobility indicators are essentially at normalised levels currently, with foot traffic typically seen at ~90% of pre-Covid levels in key retail areas. Food and beverage, along with travel and sportswear are reporting much stronger trends in February although auto sales remain more tepid given a strong 2022 off the back of government auto incentives. Recently reported February PMIs were much stronger than expected, at the highest rate since 2012 albeit benefitting from low base effects and CNY timing. There was early signs of improvement in the much maligned property sector, with secondary home sales showing strong improvement YTD, whilst new home sales also improved off a low base along with a stabilization in new home pricing. Whilst developer financing has improved due to policy support, state banks look to remain selective on such lending and thus unlikely to stimulate a similar recovery level compared to the consumer side. Indeed it was reported that such overall recovery has surprised the central authorities to point where additional stimulus will be focused on supporting rather than driving the economy. Geopolitics continue to act as a overhang for the China/HK markets as it has for many years, with concerns that China may start to supply Russia with weapons, something China continues to deny as they have done for the past year following similarly voiced concerns from early 2022.

Korea and Taiwan continue to be driven by the more constructive view on the IT cycle bottoming. Q422 results were weaker than expected with most earnings bottoming expectations being pushed back from Q1 to Q2. End demand across key drivers of PCs, smartphones and servers remain weak although auto semiconductors remain strong due to recovering global sales post shortages 2022. Inventory levels look most supportive for the China smartphone segment to recover first followed by PC. Memory pricing continues to fall aggressively with further capacity cuts announced to help stem such oversupply and price declines going forward.

India’s consumer discretionary segment continues to report softer trends off a high 2022 base particularly in areas such as apparel, painting and restaurants. Industrial trends remain stronger supported by budget public capex leading up to an election year.

Fund Performance & Positioning
The Fund was up 29bps vs. the benchmark (MSCI Asia ex Japan) during February. Excluding cash, country allocation was slightly positive with our overweight in outperforming the China A share market helping, despite our small underweight in better performing Taiwan and India. Sector selection was negative ex cash due to our biggest sector overweight in Consumer Discretionary hurting performance being one of the weakest performing areas.

Our positioning remains similar with a preference for China/HK largely through consumer whilst remaining more cautious on manufacturing despite recent PMI beats due to weak export trends. We do have property exposure indirectly through banks, furniture and waterproofing that we believe will benefit if early recovery continues but have far less conviction vs. the highly visible recovery in consumers. We remain with a small underweight to India as well as Korea and Taiwan though have increased IT exposure selectively in early cycle recovery plays such as memory, PCs and smartphones and see more upside to our allocation going forward. Within China internet, we have a preference for mobile gaming (e.g., Tencent) given recent game approvals and usage trends, whilst ecommerce has yet to show noticeable signs of improvement vs. offline as shown by Alibaba guidance. JD.com also announced aggressive discounts that will likely pressure the competitive dynamics in such weak demand environments.

Our biggest contributors to performance in February were Wanhua Chemical and APL Apollo. Wanhua is reporting a bottoming in spreads and improvement in pricing in their core chemical product in part due to end drivers being property related usage. APL Apollo, a steel product provider, is benefitting from the strong construction trends in the country, whilst structurally their new capacity coming online is geared to higher margin specialist products.

We looked to gain additional exposure to companies benefitting from the strong public and private capex cycle. KEI Industries provides cables and wires that are used in property construction and infrastructure such as power generation and railways. Power generation capacity is growing strongly post electricity deficits in past years whilst India is experiencing a strong property cycle and railways are a key beneficiary of recent budget capex build outs. KEI is shifting from the Business to Business segment to the Business to Consumer area which carries higher margin, particularly as they are now reducing price discounts as their consumer brand image has been built up over the years.

China Merchants Bank was the weakest stock in the month. They are known to having some of the highest property exposure of major China banks and thus generally trades more aligned to property developers than peers. Despite a more constructive tone on the sector recently, developers typically had a weaker month as January data showed no improvement in new homes sales.

Outlook
Whilst we are constructive on the China/HK market as a whole (overweight combined), we hold a preference for A shares vs. H shares reflected in our overweight A share position. The mainland markets had lagged HK markets since the November re-opening and past weeks showed clear signs this gap has started to reverse, in part due to A/H valuation premiums converging to near historic lows. A share markets are more domestic and retail driven thus we expect, as consumer sentiment improves in China, this will disproportionately benefit A shares vs. more foreign owned H shares. In line with consumer sector support, state banks have been pushed by the government to offer attractive consumer loan rates, and there has been talk of many of these loans actually being invested into the stock market instead.

The recent sell off of the Hong Kong market to us has provided an attractive opportunity to top up key China positions, especially in areas such as China internet and consumer. Geopolitical risk is here to stay for years to come with such unknowns that can only be managed through the stringiest risk controls. We can only focus on the fundamentals we see in front of us, and they continue to improve in China vs. past months. Outside of consumer, we will need to see further monthly data in March and perhaps April to confirm the validity of such improvement in property and manufacturing given high base and CNY impacts on February data.

Generally speaking, much of the outperforming areas of the China/Asia market YTD have been high beta, cyclical stocks. However many of these in IT and machinery are not for now backed by any sign of fundamental improvement (but rather hopes of a strong V shaped recovery from here on in) and thus we have not chased these names and given such disconnect between share prices and earnings, most of these stocks are now trading at unattractive multiples vs. their history. Therefore we expect a bout of realism to consolidate this area for the next few months, allowing those stocks with actual earning recovery trends to become the dominant factor of outperformance.

Fund Manager
Chris Chan
Portfolio Manager
Hong Kong

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