Pacific ex Japan equities extended their losses in a volatile quarter for world markets. Persistent concerns over the US-China trade conflict and the pace of US interest rate hikes dominated sentiment. The darkening global economic outlook further troubled investors. Notably, China’s economy recorded its weakest quarterly growth since the global financial crisis. Industrial production and retail sales also slowed more than expected, heightening growth concerns. Policymakers responded with measures to support the economy, including cutting banks’ reserve requirement ratios and boosting credit for small and private companies.
Across the region, export-oriented markets Taiwan, South Korea and China posted sharp declines. Taiwanese and South Korean stocks were dragged lower by steep falls in technology heavyweights. In China, healthcare and energy were the worst performing sectors. Hong Kong equities retreated but outpaced the region as strong gains in consumer staples stocks helped mitigate losses.
Meanwhile, the plunge in crude oil prices weighed on the Australian market, with energy stocks leading declines. However, weaker oil prices also lifted some net oil importers; Indonesia and the Philippines bucked the downtrend to close higher. The Indonesian rupiah was also buoyed by Bank Indonesia’s surprise interest rate increase
Concerns over tightening monetary policy as central banks take steps towards normalisation are gradually giving way to fears over a deteriorating growth outlook. China’s economy weakened due to the lagged effects of slower credit growth onshore as authorities sought to rein in the shadow banking sector. Escalating trade friction with the US and tariffs imposed so far have hurt corporate confidence and capex decisions, weighing further on growth prospects.
High oil prices and a strong US dollar had put upward pressure on interest rates on emerging Asian markets, leaving liquidity conditions tighter in general – a further headwind to growth. More recently, however, oil prices have corrected sharply from their highs, alleviating pressures on current accounts of the more fragile emerging economies.
At the same time, US bond yields and rate expectations moderated significantly at the end of 2018, partly in response to the crack in the US stock market and also due to the ongoing slowdown in growth outside the US.
Our view remains that in contrast to previous “taper tantrums”, Asian emerging markets generally look better placed today from a macro perspective. That said, the backdrop for 2019 remains weak given persistent uncertainty on the trade front and continued increases in US dollar interest rates in the next few months. However, on a medium-term view, structural deflation will mean that bond yields should remain lower for longer. The demographic trend of an aging global population will underpin dividend investing in the longer term.
In the near term, dividend investing remains relevant, especially in view of the weak economic backdrop, given its strong bias to quality businesses with sound capital structures and strong cash flow generation. In Asia, where payout ratios remain amongst the lowest globally, steeply rising profitability, historically low gearing and burgeoning free cash flows present the best conditions for dividends to surprise on the upside. The propensity for dividends to surprise in Asia is further helped by improving corporate governance and regulatory changes in the region.
Given this difficult backdrop, we continue to tread carefully in equity markets and have not moved to significantly increase risk despite the recent correction. As bottom-up income orientated investors, our focus remains on those businesses best equipped to survive the current slowdown and exploit the favourable longer-term trends we continue to see in the region. Our preferred areas of investment remain in select blue chip names in Australia, Hong Kong and Taiwan, across sectors including real estate, technology, consumer discretionary and banks.
We maintain a bottom-up investment approach and we continue to look for good companies where we can see a strong income case and potential for capital growth.
The fund posted a loss and finished broadly inline with the MSCI AC Pacific ex-Japan index over the quarter.
On a country basis, stock selection and the overweight position in Hong Kong were key drivers of performance. Our holdings in Australia also added value. On the other hand, the non-benchmark exposure to Japan and underweight to Indonesia detracted.
At the sector level, the portfolio benefited from the overweight exposure to real estate, and the choice of stocks in industrials and consumer discretionary. This was partially offset by the negative impact from stock selection in the information technology and financials sectors.
|Q3/2017 - Q3/2018||Q3/2016 - Q3/2017||Q3/2015 - Q3/2016||Q3/2014 - Q3/2015||Q3/2013 - Q3/2014|
|Net Asset Value||5.9||11.6||39.2||-2.9||6.5|
|MSCI AC Pacific ex-Japan Net TR GBP||5.0||17.4||38.9||-9.2||4.0|
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 the Far East 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 invests in smaller companies that may be less liquid than in larger companies and price swings may therefore be greater than investment trusts, companies and funds that invest in larger companies.
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 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.
Investment in warrants, participation certificates, guaranteed bonds, etc will expose the fund to the risk of the issuer of these instruments defaulting. Deducting charges from capital can result in the income paid by the company being higher than would otherwise be the case and the growth in the capital sum being eroded.
As a result of the fees being charged partially to capital, the distributable income of the Company may be higher, but the capital value of the Company may be eroded.