SJB | Korschenbroich, 22.02.2022.
Die asiatischen Märkte verloren im Januar gut drei Prozent, da sich die Erwartung von Zinserhöhungen durch die US-Notenbank Fed verfestigte und somit insbesondere Wachstumsaktien belastet wurden. In diesem angespannten Marktumfeld verzeichnete der New Capital Asia Future Leaders Fund USD I Acc (WKN A2PFKL, ISIN IE00BGSXT619) eine Wertentwicklung von -6,3 Prozent im Monatsverlauf, wobei sich die Übergewichtung in chinesischen A-Aktien negativ auswirkte. Gut entwickelten sich hingegen Hong Kong-Aktien, wo besonders Titel aus den Bereichen Finanzen, Immobilien und Energie profitierten. In seinem aktuellen Monatsbericht für Januar analysiert EFG-FondsManager Chris Chan die jüngsten Marktbewegungen und gibt Auskunft über Performanceentwicklung und Portfoliostruktur seines Asienfonds, der sich auf zukünftige Gewinner und Marktführer spezialisiert hat.
Executive Summary
Key events in market
Asia markets were down 3.10% in January, outperforming US markets with similar performance to European markets amidst further concerns on an increasingly hawkish FED. In line with such interest rate hike expectations, Asia growth stocks again underperformed during the month by 1.3% with small cap stocks underperforming by over 3%. This was part of the wider factor underperformance in January of momentum stocks, those stocks that had done well in 2021 (such as China new energy stocks) vs. those such as China property that had previously underperformed.
Key performance & positioning updates
The Portfolio underperformed the benchmark (MSCI Asia ex Japan) over the month by just over 2%. Country allocation cost us 60bp due to our overweight in China A share market that underperformed our underweighted Hong Kong exposure that did well in line with the momentum rotation with Hang Seng being the weakest market 2021. Value sectors of Financials, Property and Energy performed the best vs. growth areas of Healthcare and IT, with sector contribution largely neutral in the month in part due to increased weighting to Financials.
Market Update
Asia markets were down 3.10% in January, outperforming US markets with similar performance to European markets amidst further concerns on an increasingly hawkish FED. In line with such interest rate hike expectations, Asia growth stocks again underperformed during the month by 1.3% with small cap stocks underperforming by over 3%. This was part of the wider factor underperformance in January of momentum stocks, those stocks that had done well in 2021 (such as China new energy stocks) vs. those such as China property that had previously underperformed.
The main news out of Asia in January was that of the step up in monetary easing in China in response to the continued weakness in the economy notably the Property and Consumer segments, with manufacturing proving more resilient due to continued strong exports. The PBOC cut both their MLF and LPR (mortgage linked) rates during the month, with an additional incentive to get ahead of the FED tightening later in the year to avoid any significant capital outflows as was the case in 2015. There is also the expectation of increased fiscal stimulus, largely through ‘green’ infrastructure as shown by the increase in December of local government bond issuance. This monetary easing stance stands at a contrast to the US tightening, supported by weaker economic momentum and little inflationary pressures with China CPI coming in low single digits. Historically China stock markets have a strong correlation to monetary conditions vs. most other major markets. The government enacted further support for property developers by allowing them to access escrow funding from pre sales to help liquidity. China Property and Financials helped propel the Hang Seng to outperformance off the back of such wider support.
South Korea was the worst performing market in Asia where growth and small cap stocks have been particularly hurt by the Bank of Korea’s own hiking regime, the most advanced of any Asia market with a soon to be third rate hike in 6 months. Being more exposed to global growth concerns (through high export contribution), the market also fell with the US. The IT sector being weak also contributed.
ASEAN markets were the strongest in January as they continued their progression out of late stage lockdowns as shown by their best in region earning revisions. GDP growth for many of these markets is expected to exceed China for the first time in a decade as South East Asia’s recovery is at a much earlier phase vs. North Asia.
India announced a pro growth budget similar to last year, with focus on increased infrastructure spending. Whilst the economy continues to recover, inflation concerns are higher here than most Asia markets and the Bank of India is likely to start tightening soon in response.
Fund Performance & Positioning
The portfolio underperformed the benchmark (MSCI Asia ex Japan) over the month by just over 2%. Country allocation cost us 60bp due to our overweight in China A share market that underperformed our underweighted Hong Kong exposure that did well in line with the momentum rotation with Hang Seng being the weakest market 2021. Value sectors of Financials, Property and Energy performed the best vs. growth areas of Healthcare and IT, with sector contribution largely neutral in the month in part due to increased weighting to Financials.
Hong Kong listed Techtronic was the worst contributor in the portfolio, unsurprisingly as our most US exposed company, penalised for such US market weakness. They design and manufacture their own construction tools and excel in cordless product focus, that is benefitting from structural growth away from wired. Given such product, they are exposed to US housing and infrastructure trends. Techtronic has proven itself over a long track record by compounding topline through market share gains and margin expansion through continuous product innovation.
Our new energy stocks of BYD and Longi Green Tech were the victims of the momentum rotation, both having had strong 2021. BYD’s fundamentals continue to be strong, benefitting from both the overall EV market strength in China but also market share gains with monthly sales trends impressing even vs. other China EV brands.
Their in house batteries also continue to win new contracts with global OEMs. Longi Green Tech remains a beneficiary of likely strong 2022 solar growth once again, estimated to be 30%+ globally, driven by China. Short term margins may weaken as solar module prices will fall vs. working through higher cost inputs but this should offer positive volume elasticity for topline given deep under penetration of solar energy.
During the month we increased our exposure to Financials (now largest active weight) with our top three weighted banks contributing 1% positive alpha, helping slightly to offset the underperformance from elsewhere. Singapore banks such as DBS typically benefit from higher US rates through their linked FX to the USD, whilst we remain most positive on ASEAN and Indian banks, both benefitting from improving credit growth and asset quality as economies recover vs North Asia. Indian banks have the added potential benefit of rising rates over the next year due to inflation concerns.
During January we added a recent India IPO – Sona BLW that specialize in EV auto components. Through M&A they have combined (German) mechanical engineering expertise with (US) electrical engineering to offer high quality differential gears at significantly cheaper labour cost to global peers, thus winning new contracts with leading EV and OEM brands. Recent results showed triple digit growth in their EV order book, 90% from ex India passenger vehicle brands with half the revenue coming already from EV/hybrid cars, more than the vast majority of global auto suppliers.
Outlook
Due to the greater willingness seen in recent weeks for the China PBOC/government to support the weakened economy, we have become more positive on the China markets and have increased our exposure during January. With monetary and fiscal support and the historically strong correlations to the stock market, we believe this bodes well for 2022. That said, given the underlying concerns on property prices and provincial government debt levels, we do not expect a return to old ways and both mechanisms will likely be supportive but more muted vs past times of economic weakness. Furthermore, despite the clear desire to stabilize the economy (and get GDP growth back on target at 5%+ vs Q4 likely 4.5%) we do not expect a sudden and linear transmission from policy to the real economy benefits with banks already reporting a breakdown from social financing expansion and underlying credit growth. It will take time for such to feed through and will undoubtedly require further rate cuts, but given the significant underperformance in 2021, supportive valuations, under owned mutual fund positioning and with fundamentals yet to inflect up, we see more upside than downside from here.
We expect both the Hang Seng and Mainland market to benefit, with the former exposed to China Internet that was the worst performing sector last year (and thus most susceptible to mean reversion). Mainland markets should also do well given lower China rates should be supportive for growth stocks even in the face of FED tightening and thus the new economy stocks that did well last year such as EV/Solar and IT should continue to do so. We remain a little underweight China Internet still, with less regulation news flow a positive in recent months, countered by ongoing earning weakness that shows little signs of improvement thus far. With Ecommerce penetration the highest in the world, the sector is far more exposed to top down, macro weakness than before and this has come through in weak December sales trends in line with overall China consumer weakness.
The China property sector is likely to be one of the main direct beneficiaries of such policy support however similar to the Internet space, fundamentals remain poor and regardless, developers do not fit our framework. One can get indirect exposure to the sector however through areas such as high quality home appliances, furnishing or building materials companies and this is something we have explored.
We remain slightly above neutral country weighting to India, after a strong 2021 has left valuations with less upside vs other Asia markets particularly in the small cap space where we have significant exposure. Earning growth is still expected to be strong again in 2022 at 15-20% and the pro growth budget will further help sentiment. That said, inflation concerns are there, with CPI around the RBI target already and tightening may slow down such growth. There are perhaps early signs of such, with recent factory growth at 4 month low due to such inflation fears. Within India, we continue with our strong bias to domestic cyclicals and hold little index heavyweights such as IT services that have much more EU/US exposure that may slow this year vs India.
We prefer and are overweight ASEAN markets such as Indonesia and Vietnam that are likely to have some of the strongest real GDP growth in the region for 2022 off lower base. Earning revision trend support such top down view.
Given we do not own fossil fuel Energy, Mining, Utilities or Property developers (due to both ESG and investment process reasons), such value exposure remains hard to come by in times such as 2021 and January 2022. We try to use as many levers as we can to minimize such style drag, notably choice of sectors, countries, market cap and of course stock weightings. Whilst underperformance is always disappointing, we remain confident that the fundamental trends in our holdings (often growth stocks) are noticeably superior to many of the stocks that rallied in January and do not consider such rotation to be driven by fundamentals but sentiment through such FED tightening. In this regard we do not believe it to be sustainable.
Given our positive view on China markets for 2022, coupled with our bullishness on ASEAN and constructive view on India and the IT sector (reflected largely in South Korea and Taiwan), we believe Asia markets as a whole are suitably set up for a more positive year, with significant catch up potential vs. developed markets.
