The benchmark MSCI AC Asia Pacific ex-Japan rose +6.5% in Euros during the first quarter of the year. A strong start to the year in January was followed by setbacks for equities in February and March, but still positive performance.
Very shortly after we observed the peak “growth” relative to “value” dislocation in close to a hundred years in global equity markets, in particular the US, a spike in the US treasury yield curve is now pausing the “growth” and theme-driven investing trend. Markets are starting to react to rising inflation expectations. We are also seeing the early innings of smaller company outperformance in the Southeast Asia sub-region.
Higher nominal GDP growth (i.e. reported real growth plus inflation) is associated with the outperformance of value over growth stocks according to most studies, and global value stocks tend to outperform the S&P500 during inflationary periods, setting a constructive scene for future performance of emerging and Asian markets.
The fund followed up its fourth quarter outperformance with another quarter of above benchmark results.
Niche technology companies were major positive performance drivers. Domestic consumption in China and regional infrastructure were also positive themes.
Detractors were Alibaba following the anti-trust crackdown in China, and the Indonesian holdings.
China’s crackdown on tech monopolies is of course a reflection of Xi continuing to stamp his authority on country and party, and will continue to affect the “China Internet” theme popular with investor and this will be relevant for the rest of Asia too, as the surplus cash flow of China’s internet giants has in the past few years increasingly found its way into venture capital funding the Internet ecosystem of Southeast Asia and India.
Outlook and Strategy
Emerging Asia’s exports have been remarkably strong, with most recent January figures more than a fifth above their pre-pandemic level, as Western consumers are primarily restricted to goods purchases with the service component “under lockdown”. The pandemic’ boost to demand for electronics and protective equipment aided in particular China and North Asia’s exports performance, where exports of pandemic goods offset the fall in global demand.
As global consumption patterns normalize towards the end of 2021 and 2022, and Western consumption shifts to services and within goods rotates a little back to items like clothing again, we should see in particular emerging & frontier Asia benefit, typically home to more traditional exporters. For example, Cambodia, Vietnam and Bangladesh’s exports of textiles & footwear normally account for are 35%, 20%, 15% of GDP respectively, i.e. a dramatic direct contribution, not to mention the attendant employment effects. Mass market tourism revenue will remain constrained and pin down Thailand’s growth, but borders will open just enough to make the medical tourism theme viable again. The Indonesian economy will follow its reform-path somewhat independent of “normalization”. That “normalization” may however be delayed as the third wave appears to delay the expected benefits of vaccination in the West. Asia as a whole unfortunately seems to be lagging in vaccinations, in part self-inflicted but in part also because most of Western production has been horded. Only Singapore has vaccinated more than 10% of its population so far. We thus believe the domestic services sector will take longer to recover.
China remains the most “normalized” major economy in the world, with the main exception being the absence of outbound travel, which normally facilitates significant current account outflows. Property sales have remained strong, with the big metropolitan areas outperforming, despite the continued regulatory tightening in China’s property sector. But China is undergoing a very meaningful change in economic strategy. Self-sufficiency (e.g. in semiconductors), innovation and productivity gains, and environmental leadership are the major planks, informed by domestic pressures such as the environmental cost of growth, and China preparing for prolonged confrontation with the West, and Xi’s concept of Dual Circulation.
Importantly, in its 14th Five-Year-Plan covering 2021 to 2025, China has for the first time abandoned an overall economic growth target. Growth is to remain at “ a reasonable range”, with the first year set at above 6%. It is said this would allow planners to cope with global uncertainties. It is important to remind ourselves that economic growth is an input, not a residual, of China’s economic model. Simultaneously, also an input, credit is now meant to grow no faster than GDP and we have seen a tightening of credit once more.
Florian Weidinger, Hansabay