Market Review
The benchmark MSCI AC Asia Pacific ex-Japan declined -8.2% during the fourth quarter of the year.
This was again accompanied by mid single digit falls in emerging market currencies against the US Dollar. Local equity and international currency markets frequently move in lockstep, amplifying price changes. January is (positively) working in the same manner with strong share price gains paired with local currency gains.
It is too early for company earnings assessments as most portfolio companies will announce their full-year results in the coming few weeks after Chinese New Year in February, and we will be visiting portfolio companies in Hong Kong then. Apple had reported that more than 100% of its Q4 revenue decline occurred in Greater China, which added the perceived risk of a China slowdown to investors’ list of worries. Asian market fortunes have turned significantly to the positive as discussed in the outlook below.
Performance Review
The relative outperformance in this past quarter was driven by positive news flow in two shareholder value activist positions, and a turnaround in Indonesian equities as the local Rupiah currency stopped depreciating against the US Dollar. The same is true in absolute terms for the winners. Other than equity weakness across the board, positions in Indonesian media and Chinese retail were performance detractors.
Outlook and Strategy
In December, the pace-setting US equity markets saw the highest weekly outflows from actively managed funds since 2000, resulting in the biggest monthly equity decline since the financial crisis. We had written in our Q3 review how emerging markets often trade to the extreme points of maximum pessimism or optimism, or even beyond that. Q4, and in particular December was certainly beyond such point, with Asian equities at historic lows.
At the end of December, the price-to-earnings ratio of the Asia Pacific ex-Japan index was around 12x, only 10% above the 2009 low of 10.5x. The same applies to price-to-book ratios around 1.3-1.4x.
The year 2019 started very strong, with strong reversals in performance, including the NESTOR Far East fund. A key change in the market has been the stop in the rise of the dollar, which is an important leading indicator for emerging market investors, who are now coming back in. US rate hike expectations have equally reached a plateau and Asian central bankers are no longer pressed to raise rates on their local economies in fear of rising US rates and the US Dollar. There is room to do that as simultaneously regional inflationary pressures are abating after their autumn peak, and this is without the benefits of a lower oil price (which typically takes a few months to feed into inflation numbers).
All in, the macroeconomic picture is looking conducive for Asian equities, and the fund reflects that with a minimal cash allocation today. The NESTOR Far East fund maintains its exposures in long-term thematic areas, such as healthcare (ageing populations), food consumption (rising middle class), and infrastructure expansion (upgrading and regional investment cycle).