The MSCI AC Pacific ex Japan Index rallied strongly. South Korea was the best-performing index market, aided by strong gains from the tech sector. Indonesia, Thailand, Taiwan, Australia and the Philippines also finished ahead of the index. Malaysia, China and Hong Kong generated more modest gains and underperformed. In China, tensions with the US, and anti-trust moves weighed on sentiment somewhat.
The fund (NAV) posted a gain of 14.2% over the fourth quarter, outperforming the MSCI AC Pacific ex-Japan Net TR GBP index, which gained 12.5%.
Asset allocation was the key driver of the fund’s relative returns, while stock selection detracted.
At the regional level, the underweight exposure to China contributed strongly to performance. Stock selection was positive in Taiwan, China, New Zealand and South Korea. This was more than offset by negative selection in Hong Kong, Singapore and Thailand.
At the sector level, overweighting the information technology sector and underweighting the consumer discretionary sector notably contributed to returns. Meanwhile our real estate overweight detracted. Stock selection in consumer discretionary was particularly strong, while it was weaker in communication services and financials.
Equity markets in Asia finished 2020 strongly. Regional indices made new highs on the last trading day of the year, as investors continued to focus on the potential normalisation in economic activity in 2021 as vaccines start to be rolled out in the coming months. This was despite the continued deterioration of Covid-19 case numbers in many Western countries in recent weeks and the imposition of tougher lock-downs. Optimism in markets is predicated on the scope for a sharp rebound in earnings through 2021-22 at a time when interest rates are likely to remain close to zero and central banks are expected to maintain ample liquidity to underpin the economic recovery. In recent months, we have already started to see an upturn in earnings forecasts for the broader Asian indices, which supports this more optimistic perspective.
Within this move in markets since November, we have seen a much sharper rebound in some of the stocks, sectors and countries that were lagging in earlier months – i.e. those that were perceived as ‘lockdown losers’. However, there remains a lot of uncertainty about the durability of this rotation within markets. On the one side, positive news on the effectiveness of vaccines should significantly reduce the downside risks over the next 1-2 years, and if inoculation happens rapidly through the next 6 months, then a rapid normalisation of activity could be apparent by late 2021. This would be very positive for growth as pent-up demand is released for travel, entertainment and other depressed areas of consumption and investment. Moderating this positive cyclical outlook, however, is the reality that there is still a very difficult winter ahead in many countries, with high levels of coronavirus infection and continued lockdowns that will depress demand. Large-scale government support programmes that have propped up consumption in many countries this year may also wind down in some countries as we go into 2021. The real improvements in mobility within economies, and via international travel, will not be apparent for 9-12 months, and that presupposes no hiccups along the way in pushing rapid adoption of the new vaccines. So, after the initial snapback in activity, the cyclical upswing may prove to be relatively anaemic as many of the headwinds that depressed activity and inflation in the preceding decade reassert themselves. These include heavy indebtedness, adverse demographics, technological disruption, and income inequality.
In light of the Covid-19 pandemic and uncertainty over economic growth, there has been ongoing news flow over dividend cuts and although dividends have been cut in Asia the region hasn’t seen some of the wholesale cuts seen in other regions. In part this has been helped by its relatively low starting payout ratio and the fact that listed corporates have come into the crisis with a relatively low gearing ratio versus other regions. This contrasts markedly with some other regions where payout ratios and gearing are already high.
This is not to say that Asia Pac is immune to cuts and if one looks at Australia and New Zealand their payout ratios are high by regional standards and unsurprisingly, given the macro backdrop, we have seen overall cuts to dividends including in the more cyclical and financial related areas. However, more broadly across Asia it is the trajectory of earnings that will be the likely driver of dividends. So with earnings having been revised down across the region this year, combined with increased concern over a COVID second wave, its perhaps unsurprising that we have seen some cuts and caution on dividends coming through during the recent results season. Some has been caution from the authorities with the Monetary Authority of Singapore curtailing banks dividends to 60% of what they had paid in 2019 until there is greater clarity on the outlook despite the banks being very well capitalized. However, in other areas we have seen dividends being maintained or even increased including amongst the property names in Hong Kong. The rate of downgrades to earnings has slowed recently and, although very COVID dependent, if this trend continues could present a better backdrop for dividends next year.
Given this uncertainty, we remain fairly cautious in the near term, and following the rally we have been taking profits on some names where we feel valuations have already moved to fully discount better growth prospects or any imminent recovery. Our preference when adding to names in the current environment would still be to focus on those better quality names, and selectively amongst some of the derated areas of the market where we believe there is a strong rationale for that discount to narrow.
In terms of portfolio strategy, 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.
|Q1/2016 - Q4/2016||Q1/2017 - Q4/2017||Q1/2018 - Q4/2018||Q1/2019 - Q4/2019||Q1/2020 - Q4/2020|
|Net Asset Value||30.1||15.7||-6.9||14.0||13.1|
|MSCI AC Pacific ex-Japan Net TR GBP||28.2||25.1||-9.2||15.7||19.2|
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 amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. Some performance differences between the fund and the index may arise because the fund performance is calculated at a different valuation point from the index.
Source: Morningstar, net income reinvested, net of ongoing charges and portfolio costs and where applicable, performance fees, in GBP.
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.