Latest trust commentaryQ1 2023
Asian equities recorded a positive return in the first quarter of the year, with strong gains from Taiwan, Singapore and Korea while performance from Hong Kong and India were weaker.
China started the quarter with robust gains led by reopening fervour with consumer and internet stocks both performing strongly. Market sentiment was further bolstered by more supportive property market measures and hopes of looser regulatory scrutiny on the internet and technology sectors in China. However, some of the earlier gains were subsequently reversed amid the reescalation of geopolitical tension between the US and China, while investors started to look beyond the initial bounce from the uplifting of Covid restrictions and awaited more evidence of a sustained earnings recovery of the domestic economy.
Korea and Taiwan markets also performed well since the start of the year, owing to gains in the key large-cap semiconductor stocks that dominate the benchmark indices, as investors started positioning for a potential demand recovery in the second half of the year. Meanwhile, India was weaker as investors took profits following the strong outperformance from the previous 18 months and rotated into China and other North Asian markets given their more positive cyclical momentum as the activities continued to normalize. Asean markets were generally weaker amid the uncertain external backdrop, except for the banking sector which held up relatively well as the higher interest rate environment continued to provide a positive backdrop for the sector.
Over the quarter, the fund posted solid positive returns and outperformed the reference regional index. The fund’s large overweight exposure in technology names including Taiwan’s TSMC and MediaTek, and Korea’s Samsung Electronics were among the key contributors to performance, as investors started pricing in a bottoming of the semiconductor downcycle and expected a gradual improvement in inventory digestion through the coming quarters. The recent cuts in capital expenditure by memory producers also supported the view that the sector may be approaching the trough of the cycle, while China’s re-opening could offer a timely support for demand for certain consumer IT products through this year.
Outside of technology, our key consumer discretionary holdings including luxury brand LVMH and casino operator Las Vegas Sands traded higher and contributed strongly to performance as they remained key beneficiaries of the sharp rebound in high-end consumption and travel / mobility in China following the end of its zero-Covid policy. Meanwhile, our zero exposure to China’s ecommerce names such as Meituan, JD.com and PDD also added to relative performance as the shares were under pressure as the rising competitive intensity of the sector continued to erode profit margin of the industry. Companies continued embarking on major subsidy drives to defend / capture market share at the expense of profitability, which leaves us cautious on the industry in the near term.
Meanwhile, some of our blue-chip holdings in Hong Kong such as Swire Pacific, BOC (Hong Kong) and Techtronics traded marginally lower and offset some performance. Our bank and insurance holdings such as Singapore’s DBS and Hong Kong’s Prudential were also under pressure as the turmoil triggered by the collapse of the Silicon Valley Bank and the bailout of Credit Suisse by UBS has dampened investors’ sentiment towards the sector in general.
In terms of hedges, the market rally at the beginning of the quarter has helped boost market sentiment, which afforded us the opportunity to buy some Taiwanese put options at reasonable prices, with those put options spanning different strike prices and expiry dates. This leaves our portfolio with a 5.2% notional hedge exposure at the end of Q1. We will continue to monitor put prices for these cheap days as will look to reduce the net exposure further at the right price.
What are the risks?
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.
Investors in the emerging markets and Asia should be aware that this involves a high degree of risk and should be seen as long term in nature. Less developed markets are generally less well regulated than the UK, they may be less liquid and may have less reliable arrangements for trading and settlement of the underlying holdings.
The Company holds investments denominated in currencies other than sterling, investors should note that exchange rates may cause the value of these investments, and the income from them, to rise or fall.
The Company invests in smaller companies that may be less liquid than in larger companies and price swings may therefore be greater than investment companies that invest in larger companies.
The Company may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so.
Investments such as warrants, participation certificates, guaranteed bonds, etc. will expose the fund to the risk of the issuer of these instruments defaulting on paying the capital back to the Company
The fund can use derivatives to protect the capital value of the portfolio and reduce volatility, or for efficient portfolio management.