SJB | Korschenbroich, 28.08.2022.
Die asiatischen Märkte gaben im Juli um 1,2 Prozent nach und entwickelten sich damit schwächer als die USA und Europa. Während sich in China die Börsenstimmung aufgrund der Probleme im Immobiliensektor eintrübte. performten indische Aktien vergleichsweise gut. In diesem wechselhaften Marktumfeld verzeichnete der New Capital Asia Future Leaders Fund USD I Acc (WKN A2PFKL, ISIN IE00BGSXT619) eine Performance von -2,53 Prozent. Der Asien-Fonds mit seinem Fokus auf Wachstumstitel litt unter seinem geringen Exposure in starken Märkten wie Taiwan und Südkorea. während sich die Übergewichtung im IT-Sektor positiver auswirkte. In seinem aktuellen Monatsbericht für Juli 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 -1.21% in July, significantly underperforming US and European markets that were up high single digits. China & Hong Kong were the main culprits with the mainland CSI index having its worst month vs. the S&P since 2016. This was driven by worsening sentiment in the China property sector through homebuyers holding off on mortgage payments due to delays in completions. India was the best performing market as a drop in oil price expectations reduced concerns. IT was the best performing sector whilst property and consumer discretionary the worst.
Key performance & positioning updates
The portfolio underperformed the benchmark (MSCI Asia ex Japan) during July by ~1.3%. Country allocation was negative due to our underweight in strong performing Taiwan and South Korea along with our overweight in the weak onshore China market albeit offset by the gain in our underweight in Hong Kong. Sector allocation was a smaller negative due to our overweight in the IT sector that was driven by Semiconductor and Indian IT services. Growth stocks performed relatively in line during the month and small cap stocks reversed the past 2 month trend to outperform.
Market Update
Asia markets were down -1.21% in July, significantly underperforming US and European markets that were up high single digits. China & Hong Kong were the main culprits with the mainland CSI index having its worst month vs. the S&P since 2016. This was driven by worsening sentiment in the China property sector through homebuyers holding off on mortgage payments due to delays in completions. India was the best performing market as a drop in oil price expectations reduced concerns. IT was the best performing sector whilst property and consumer discretionary the worst. China Covid cases increased during July and then tailed off again later in the month. Zero Covid policies remain in place, with a focus on district mass testing/lockdowns and closed loop production (e.g. Shenzhen) when outbreaks occur. Generally this has allowed the re-opening to continue and lessens the impact on economic and consumer activity, however there were still selective citywide lockdowns albeit lasting a few days.
The China property sector was hit by a growing pool of mortgage holders refusing to repay their debts as completions were continuously being delayed given the liquidity issues occurring with many property developers. This movement grew to the point that the China government essentially allowed these homebuyers to postpone payments, whilst encouraging once again the state banks to support developers with enough liquidity to complete the projects. The government went a step further and announced a state backed real estate fund that can be used to prop up developers where needed. Home sales fell 38% y-o-y in July, showing limited improvement from June’s -42% fall.
This continuous weakness in demand has led to further technical defaults in the China property bond market.
The impact of recurring Covid outbreaks and mass testing along with the property concerns is having an impact on consumer spending. After a strong uptick in June post lockdown, much consumer activity has stagnated in July. Premium ICE auto sales are weakening across dealership, apparel and many consumer staple products are experiencing high discounting to clear already high inventories. Electric vehicle (EV) sales continue to outperform most consumer segments however and travel trends (i.e. hotel occupancy rates) resume on a normalization trend.
Manufacturing, a prior bastion of strength for the economy, is also showing clear weakness in July. Factory activity contracted with PMI 49 vs. 50.3 forecast with many industrial machinery stocks (whether China, Taiwan or Japan) reporting weaker than expected July orders. Weaker exports through global demand weakness is a key driver. Much of China optimism was also based on infrastructure spending, but there appears to be a mismatch between funding raised for projects and the execution on the ground. All construction companies are reporting little improvement as of yet for infrastructure whilst continuing to be pressured by weak property activity for above reasons.
India not only benefitted from a drop in global oil prices, but continued solid economic trends, with industrial activity growing at the fastest pace in 8 months in July. The Indian financial sector reported strong trends across the board, a sign of the overall health in the economy.
Fund Performance & Positioning
The portfolio underperformed the benchmark (MSCI Asia ex Japan) during July by ~1.3%. Country allocation was negative due to our underweight in strong performing Taiwan and South Korea along with our overweight in the weak onshore China market albeit offset by the gain in our underweight in Hong Kong. Sector allocation was a smaller negative due to our overweight in the IT sector that was driven by Semiconductor and Indian IT services. Growth stocks performed relatively in line during the month and small cap stocks reversed the past 2 month trend to outperform.
We remain comfortable with our underweight in the Semiconductor/IT hardware space and reduced IT large caps TSMC and Samsung during the month. The fact IT has been the best performing sector May, worst in June and best again in July shows the volatility and dispersion of views amongst investors. The bull case is that valuation troughs have been reached and in key areas such as memory, capex rationality from prior consolidation will balance supply with weakened demand. We believe as recent results have shown, earnings have a long way still to fall even if indeed valuation multiples have troughed. Capex rationality will come into play over the coming years but the 6 month view will not be impacted vs. inventory levels that remain elevated on both sides of the supply chain. We remain underweight South Korea and Taiwan as a result.
We reduced Financials exposure to neutral during the month but maintained our heavy bias to India and Indonesia banks that are showing the best trends across loan growth and asset quality. We reduced China Merchants Bank due to its property exposure albeit thus far has shown little negative impact on delinquency. There was limited country changes, with our HK underweight ~7% vs. OW in China A share 8%. The biggest detractors in the month were Chongqing Brewery in China, which produces and retails beer and Wanhua Chemical, which produces chemicals in China. Chongqing was benefitting from China reopening due to large on-premise (bars & restaurants) exposure. As Covid outbreaks continued, some profit taking occurred. Wanhua Chemical was weak due to MDI/TDI (two different forms of diisocyanates). These are useful in polyurethane production/ product exposure to construction which is impacted by property sector.
ICICI bank in India was the biggest positive contributor due to continued strong results with strong loan growth over 20% y-o-y and interest margin expansion. Credit costs also improved as improving economic conditions helped recoveries. We added A share EV equipment manufacturing Wuxi Lead Intelligent. Wuxi supplies tier 1 battery clients such as CATL and benefits from the significant industry capacity additions. They are now winning contracts such as tier 2 China clients and also overseas like Northvolt in Europe. There are currently very few companies that can produce such equipment at such scale and cost, thus orderbooks are high and lead times are 6-12 months.. This allows for more pricing power than before and less reliance on CATL has also helped improved working capital bargaining power.
Outlook
Our relative optimism on China in prior months was driven by post lockdown reopening, supportive monetary and fiscal spending (particularly vs. other tightening economies) and an improvement in regulatory sentiment regarding index internet heavyweights. Our position has unsurprisingly become more incrementally negative during July. Any significant property market recovery was not in our base case but we did expect a clearer stabilisation in trends and marginal improvement from there. July leads us to conclude that a sustained and clear recovery is a long time away, in large part because government attempts to support the sector is having little impact for now.
Regardless of mortgage rates being lower, there is not the appetite for large ticket purchases such as property when Covid policy remains strict, global and China economic concerns are high and property developers continue to struggle with liquidity. The mortgage boycott headlines will only undermine would be buyer confidence further. This has fed through into underlying consumer weakness as shown by weakness across the board in staple and discretionary consumer products in July. With manufacturing also weak due to global export weakness, China needed fiscal spending to support growth. As mentioned this has not come through past the funding round, being constantly delayed for various local government reasons despite central government pushes. The Politburo meeting in July also missed expectations for stimulus for both property and infrastructure. Monetary support remains as shown by M2 supply (a measure of money supply that includes cash, checking deposits, and easily-convertible near money), but the transmission to the real economy remains questionable albeit credit growth did pick up the past months.
We have relatively limited cyclical exposure to China as a result of the unclear recovery momentum, sticking to quality growth in areas of EV, Solar, Internet and Staples. We have limited exposure to the property market, construction/materials (e.g. cement/steel) and industrials (ex EV) and are underweight China Banks. EV sales continue to impress, helped by shorter term auto incentives and the continued share gains from ICE. Solar trends also are strong with some Korean solar module companies reporting very strong EU demand given high gas prices are resulting in high electricity prices leading to better IRR economics for utility companies to use solar power. The EU largely gets all solar modules from China. China solar demand itself is
also strong driven by the growth in rooftop distributed panels due to government push given IRRs are higher on such vs. large scale utility projects.
We believe China Internet remains a better prospect than months before, although overall consumer weakness will naturally curtail top-line recovery. Cost efficiencies will be key as a result and if the upcoming earning season can show such, that can act as a catalyst for the sector post July weakness. We are underweight Tencent and neutral Alibaba, preferring Meituan, JD and PDD that we are overweight in. With our tempered view on China, we see India and Indonesia as relatively more attractive. South Korea even outside the weak IT trends remains unattractive. Korean banks are being pressured to cap interest rates to avoid defaults in a high household debt society, and globally exposed industries are showing weaker trends such as
metals, chemicals, engineering & consruction and shipbuilding. Internet names are suffering from low ecommerce growth, weak advertising trends and cost pressures.
Like China, EV remains one of the few areas that continues to impress for now. India significantly outperformed in July and we expect short term profit taking but will look for such event to add to our neutral exposure into overweight. The banking sector as stated exhibits the best trends in Asia, the property cycle remains support and infrastructure and construction is improving. Consumer companies are hurting from inflation but end demand remains solid and any further retracement in oil and other commodities will add top down support for the economy. Indonesia likewise continues to report healthy recovery trends. Thailand (no exposure) has started to underperform having had strong market performance prior. The recovery has
stagnated, GDP improvement has slowed and the benefits of tourism reopening is proving more gradual. Thai banks are reporting much weaker trends, notably in asset quality which confirms such fragility in the economy vs. Indonesia.
In terms of more recent events regarding Pelosi’s visit to Taiwan, whilst clearly not constructive to geopolitical relations, we do not believe it is likely to lead to anything more than posturing from China (in part because China cannot afford further impact on their economy) and any market sell off on such speculative concerns would likely be a buying opportunity.
Stylistically, we believe we will see support with growth having strong potential to outperform value stocks going forward from here. Weaker US rate expectations (led by weaker inflation expectations on slower global growth) will help on the valuation compression previously seen, whilst slowing growth will shift focus to those stocks where earnings are less cyclically exposed.
Fund Manager
Chris Chan
Portfolio Manager
Hong Kong
