The MSCI AC Pacific ex Japan index was up 6.7% in Q4 in GBP terms. Korea generated the strongest gains benefitting from China’s effort to reset relations, which had deteriorated after South Korea proceeded with THAAD missile deployment.
China recorded strong gains and finished broadly in-line with the index. Chinese Q3 GDP growth was stable at 6.8% albeit higher frequency data reflected a moderate deterioration in activity. The 19th Communist Party Congress was held during October and emphasised a focus on the quality of growth and addressing structural risk. Following the Fed’s December hike, the People’s Bank of China (PBoC) did hike some rates by 5 bps. The PBoC also preannounced a targeted cut to the required reserve ratio, to take effect in January 2018. Elsewhere, Thai stocks outperformed, supported by upbeat GDP numbers. Indonesian stocks performed in-line with the broader market. Taiwan stocks underperformed amid volatility in technology stocks during the quarter.
2017 proved a remarkable year for Asian equities, with total returns for regional markets of c.40% in US dollar terms. These have been the strongest returns since 2009 and among the best five calendar-year returns we have seen in the last 30 years. Even more remarkable is that a year ago we were faced with huge political and economic uncertainties. President Trump had been elected unexpectedly in the US, huge uncertainty was created by Brexit and the future integrity of the European Union (EU) was in doubt amid a widespread rise in populist parties. A rallying US dollar, traditionally a headwind for Asian markets, and concerns over North Korea capped off the host of worries.
Given the ‘mixed’ medium term backdrop and aggregate valuations for markets that are above historic average levels, we continue to focus on bottom-up stock selection and picking longer term structural winners, rather than chasing the shorter term momentum in the more cyclical parts of the market. Rapidly shifting business models and trade patterns means that it is more important than ever to look forward at the potential growth opportunities of tomorrow rather than remain anchored in today’s incumbent market heavyweights. We believe there maybe attractive long term growth opportunities in the technology sectors – both hardware and ecommerce – and some of the more domestically-focused service sectors and financials across the region that are benefitting from rising income levels and evolving consumption patterns.
Asia is also home to world class exporters across many other sectors that are benefitting from growth in attractive market niches and, in China’s case in particular, a more competitive renminbi (RMB) exchange rate recently. Although aggregate valuations have risen in recent months as markets have rallied, multiples are not yet at worrying levels and our outlook is that we see long term opportunities in our favoured areas of the markets.
The fund delivered good GBP returns in the fourth quarter and outperformed the index. Over the quarter, the fund’s leading country contributor by far was strong stock selection in China where our holdings in the consumer discretionary and IT sectors outperformed significantly. Selection and our underweight in Taiwan was a lesser contributor.
Meanwhile, among the fund’s top detractors over the quarter was our overweight and stock selection in Hong Kong, where our holdings in real estate and industrials detracted. Another detractor was our underweight in Korea.
On the sector front, consumer discretionary and information technology were the top contributors while healthcare was the leading detractor.
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.