Latest trust commentary

Performance review

• Asian equities achieved solid gains in the second quarter, with some divergent trends across the region. A.I.-related investor optimism continued to drive the tech-heavy Taiwan and Korea equity markets higher. India was also strong in the run up to June’s Parliamentary elections on expectations of a Modi win and policy continuity from the government. In contrast, several ASEAN stockmarkets were notably weak, primarily due to “stronger for longer” US interest rate worries. Meanwhile, China gained during the quarter but saw considerable volatility as investors toggled between hopes of policy stimulus and disappointing announced measures and policy implementation. Against such backdrop, the fund posted gains over the period, but trailed the reference regional index.
• Our large overweight in Taiwan, notably within technology, continued to add to relative performance. TSMC performed strongly as it is the effective monopoly provider of semiconductors at the leading-edge nodes which are required by an increasing number of advanced A.I. applications. Other holdings in the semiconductor supply-chain also performed strongly over the quarter. These included Taiwan’s Mediatek and Chroma ATE which, like TSMC, are leaders in their respective segments and saw stronger earnings momentum on the back of A.I. related demand and capital expenditure. Two other notable strong performers were FPT in Vietnam which is benefitting from a pick-up in IT service spend in Japan as companies move more rapidly to digitalise their operations, and MakeMyTrip in India, the largest online travel platform in India, which is benefitting from the growth in both international and domestic travel.
• The strength in technology related stocks was to a large extent offset by weakness in our bank holdings in the Philippines and Indonesia given the more hawkish tone by the US Fed. Both economies are rate-sensitive where a strong dollar and higher US rates are likely to put pressure on the local currencies and keep domestic activities subdued. This combined with politics, which had become slightly less certain, has kept both overseas and domestic investors cautious on the markets. Elsewhere, HK-listed power tool maker, Techtronic Industries, also detracted. The abrupt retirement announcement by the company’s CEO, coupled with a potential “higher-for-longer” rate scenario in the US, weighed on share price.
• In terms of capital protection, our hedges had a very small negative impact on performance of the portfolio given the rising market during the period. The fund continues to run with a small amount of hedging via VIX call options and puts on the Australian index as our longer-term and short-term models, though still in the neutral territory, are turning increasingly cautious.

Outlook

Positive themes around Artificial Intelligence (AI) continued to build momentum in Q2, propelling the technology sector, particular the mega-caps names in the US, to new highs. The share price of Nvidia, rallied further pushing it past the US$3 trillion mark in market cap and putting it in the same ranks as Microsoft and Apple to be amongst the world’s most valuable listed companies. This fervour for AI technologies has been building for a good part of the last 18 months, with investors eagerly anticipating the vast demand for the innovation and its potential to transform industries, streamline operations, and open up new avenues for growth.

Meanwhile, at the country level in Asia, we continue to see very polarised risk appetite and performance. As has been the pattern for much of the last year, Taiwan and Korea posted further strong gains, led by their large-cap semiconductor stocks. India continued to be buoyed by strong domestic fund flows, despite a weaker electoral showing by Prime Minister Narendra Modi’s BJP Party. In contrast, sentiment towards the Hong Kong and China markets remains very cautious, with valuations still near all-time lows despite the rally seen during April – May on the back of expectations that new government policies would boost growth in China.

Given the rebound seen in Chinese stockmarkets during the quarter, partly on the back of recently announced measures to support the property market, it might be timely to review (and reaffirm) our view on both the Chinese economy and stockmarket. On the positive side, we do think the property measures announced are a step in the right direction towards stabilising the property market. Recent measures to cut mortgage rates, reduce downpayments and the easing of homebuyer restrictions should all help to stimulate demand. Measures to try and clear some of the unsold backlog of finished properties should also help to partly remove an overhang but more importantly it should get money into the hands of beleaguered real estate firms, enabling them to continue to finish existing developments. More efforts to backstop stronger developers via bank lending should also help boost confidence amongst consumers that developments from State-backed firms at least should get completed.

Having said that we view the problems in the property sector in China as principally structural and expect at best stabilisation at a low level rather than a material recovery. Large scale oversupply, a confidence crisis amongst consumers over the viability of developers, aging demographics, existing high home ownership levels and lack of rental market in most cities all combine to mean this sector is likely to remain a structural drag on the economy and in particular on consumption given the extent to which Chinese household savings are held in property. In our view the measures can hopefully stabilise the situation and halt the downward spiral but are unlikely to bring back the “animal spirits”.

Property sector aside, it is not all gloom for the Chinese economy. One area that came as a positive surprise to the market was the strength of exports and the manufacturing sector in China. On current trends the strong growth in exports should mean China hits, or gets close to, the authorities’ 5% GDP growth target for the year, with strong exports offsetting the weak property market and retail sales (essentially a two-speed economy). Our question however, is how sustainable is this, given rising trade tensions and the deteriorating geo-political backdrop? If exports drop whether due to a slowdown in the European or US economies or due to trade barriers, can consumption in China offset the slowdown? We remain quite cautious on the prospects for a consumption recovery in China, and the risks in our view are that the two-speed economy could become a “no-speed” economy.

Whilst there are long-term measures which we think the authorities in China could take to boost consumption the current focus remains overwhelmingly on the supply side (investment in “new productive forces” and infrastructure i.e. lots of new shiny things) to boost economic growth. This investment is in key targeted areas considered a policy priority such as semiconductors, AI, software, biotechnology, green energy, electric vehicles, and infrastructure. These policies, whilst likely to boost economic growth by creating widespread industrial overcapacity, are likely to be negative for ROIC and thus the Chinese stockmarket.

The other key market that remains a focus for investors in the region is India, which has continued to perform very strongly year to date. By now, the narrative of India's positive secular macroeconomic trends should be very familiar. At the heart of this story is a landscape of economic strength, marked by youthful demographics, increasing urbanisation and industrialisation, vigorous GDP growth, controlled inflation, expanding foreign exchange reserves, and a concerted effort towards fiscal consolidation. This solid foundation has boosted the economic growth outlook and has arguably also diminished India’s susceptibility to external shocks – such as volatile oil prices and fluctuating U.S. interest rates – that have historically unsettled the economy.

However, after 3 years of very strong performance the Indian stockmarket is now looking decidedly overvalued on all conventional valuation metrics. A portion of this elevated valuation can be attributed to foreign investors seeking alternatives to China and finding appeal in the rapidly growing Indian market. But another part of this can be ascribed to the huge influx of inexperienced local retail investors who have been drawn by the allure of quick profits, often promoted by social media influencers, all while an increasing number of domestic promoters (major shareholders with significant influence over company policies) offloaded their stakes en masse. Corporates themselves have also been busy issuing equity, with the amount of block deals and secondary issuances done in 1H24 surpassing the total for the entire previous year. Cynics will tell you that companies rarely issue equity if they think that their share prices are trading on the cheap.

In terms of positioning in these markets, in China we continue to avoid industries that are a national priority, as returns are likely to be poor due to excess investment. These include areas such as semiconductors in China, electric vehicles, new energy, etc. Rising geopolitical tensions are also likely to mean further trade tensions with the US and other Western markets. We are therefore cautious on owning Chinese companies with significant operations in sensitive sectors, whether this is internet (data gathering), healthcare or technology / manufacturing that could be deemed critical. Increasingly we think many Chinese manufacturers / exporters that compete with US and European firms could become vulnerable to anti-dumping duties amid the current geopolitical environment. We also avoid Chinese banks and financials given the current deflationary backdrop, which is likely to mean financials remain very difficult and the dividend yields offered by Chinese banks are clearly unsustainable.

Where we do see selective opportunities are on deflationary winners and stocks that benefit from downtrading in China. We also like the cashflow generative internet stocks where the market in which they operate has consolidated down to just 2-3 players. Finally, we also favour selected exporters where products are less sensitive to trade tensions and the companies have already moved to diversify their production to multiple locations.

For India, we have been and will remain very selective in our stock picks given the stretched valuations in many parts of the market. We continue to see good value in selected Indian private banks, private hospitals, and IT consulting names. During the brief market sell-off post the election, we did take advantage of the weakness to add to selective new holdings in the industrial sector in India. The correction proved to be short-lived and share prices have quickly rebounded since. We continue to scan the Indian market for investment opportunities however given increasing risks of a bubble forming in many parts of the market we are happy to remain mostly on the sidelines at the current time.

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• China risk: If the fund invests in the China Interbank Bond Market via the Bond Connect or in China "A" shares via the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect or in shares listed on the STAR Board or the ChiNext, this may involve clearing and settlement, regulatory, operational and counterparty risks. If the fund invests in onshore renminbi-denominated securities, currency control decisions made by the Chinese government could affect the value of the fund's investments and could cause the fund to defer or suspend redemptions of its shares.

• Concentration risk: The Company may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the company, both up or down.

• Counterparty risk: The Company may have contractual agreements with counterparties. If a counterparty is unable to fulfil their obligations, the sum that they owe to the Company may be lost in part or in whole.

• Currency risk: If the Company’s investments are denominated in currencies different to the currency of the Company’s shares, the Company may lose value as a result of movements in foreign exchange rates, otherwise known as currency rates.

• Derivatives risk: Derivatives, which are financial instruments deriving their value from an underlying asset, may be used to manage the portfolio efficiently. A derivative may not perform as expected, may create losses greater than the cost of the derivative and may result in losses to the fund.

• Emerging markets & frontier risk: Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty, operational and liquidity risk than developed markets.

• Gearing risk​: The Company may borrow money to make further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase by more than the cost of borrowing, or reduce returns if they fail to do so. In falling markets, the whole of the value in such investments could be lost, which would result in losses to the Company.

• Liquidity Risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. In difficult market conditions, investors may not be able to find a buyer for their shares or may not get back the amount that they originally invested. Certain investments of the Company, in particular the unquoted investments, may be less liquid and more difficult to value. In difficult market conditions, the Company may not be able to sell an investment for full value or at all and this could affect performance of the Company.

• Market risk: The value of investments can go up and down and an investor may not get back the amount initially invested.

• Market Risk: The value of investments can go up and down and an investor may not get back the amount initially invested.

• Operational risk​: Operational processes, including those related to the safekeeping of assets, may fail. This may result in losses to the Company.

• Performance risk: Investment objectives express an intended result but there is no guarantee that such a result will be achieved. Depending on market conditions and the macro economic environment, investment objectives may become more difficult to achieve.

• Private market valuations, and pricing frequency: Valuation of private asset investments is performed less frequently than listed securities and may be performed less frequently than the valuation of the Company itself. In addition, in times of stress it may be difficult to find appropriate prices for these investments and they may be valued on the basis of proxies or estimates. These factors mean that there may be significant changes in the net asset value of the Company which may also affect the price of shares in the Company.

• Share price risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. This means the price may be volatile, meaning the price may go up and down to a greater extent in response to changes in demand.