Market Review
The benchmark MSCI AC Asia Pacific ex-Japan rose +13.4% in Euros during the fourth quarter of the year, amid a general continued uptrend in global equity markets. While the current climate is favourable, it is worth pointing out that the fund is exposed to three overlapping broader capital market phenomena that have capped performance earlier on and most pronounced this past calendar year. However, since October we are seeing signs of reversal, evident in recent results:
First, emerging markets as a whole remain under-allocated and under-performing relative to developed markets. For example, emerging market equities are around their relative lows compared to US equities, going back to the 1970s.
Second, Southeast Asia, a major allocation, for all its long-term fundamental attraction, has not participated in the global liquidity-fueled rally. The MSCI Southeast Asia has lagged the broader Asia Pacific by more than 25% this last year.
Third, as analysts at GMO remarked, “Value” stocks have had their worst-ever relative decade ending December 2019, followed by the worst-ever year in 2020. The Russell growth-to-value ratio remains up almost 80% in the past four years, and at levels last seen around October 2000 during the dot-com bubble. The “Value” factor, known to academics as HML as published by the Fama-French database, has experienced its most meaningful drawdown since records began in 1926. While the fund is not following a dogmatic value strategy, and the value-growth divide in general is increasingly blurred, we have indeed been significantly invested in value-like investment cases. Having experienced the relative dislocation, we see mean-reversion potential, and the fund would certainly benefit from any normalization.
Performance Review
The fund has shown strong outperformance this past quarter, and combined with a strong start to the new calendar year, has retraced the majority of the underperformance since the spring and summer.
Major positive contributors were our Indonesian consumer positions, our investment in Bangladeshi healthcare, China domestic exposures, and our “reopening” basket of Covid-related laggards, a theme that includes travel and cinemas.
Detractors were a special situation in the agribusiness area and interestingly China internet majors, partially as a result of the state conveying its intentions to curtail monopoly-like powers in the sector. This is not particular new. Before the current confrontation with Alibaba and its founder Jack Ma, the government had targeted Baidu, and JD, all of which have gone on to resume their positive share price trajectories once an accommodation was reached with Beijing.
Outlook and Strategy
While it is naturally impossible to predict the future, it is fair to argue that should the headwinds described in the market review (in particular the extreme Southeast Asian and “Value” underperformance) turn into tailwinds, the fund should benefit above and beyond the themes we are exposed to.
It is fair to say that Asia as a whole is coming out of the crisis better than the West not only in economic terms, but also in timing. The more advanced and service-led economies have suffered a permanent loss of output (service hours e.g. in haircuts and restaurant visits are forever lost), while traditional manufacturing (and agriculture) are largely back to normal. Recovery and normalization also occur first in the East: in fact China, Vietnam and Taiwan have shown positive economic growth even for 2020, and are expected to post strong economic growth again in 2021.
Vaccination efforts are underway in all the countries we cover, and like in the West, governments are centrally organizing disbursement and paying for the vaccine. One drawback is that vaccinations do come at a significant economic cost for low-income countries. For example, Indonesia is expected to spend around 0.5% of GDP on the doses required to vaccinate its 270mn population assuming, even assuming a favourable mix of vendors.
Should it be required, developing Asia still has room for further monetary easing, given positive real rates, and low inflation. China’s inflation measures also remain near flat, but very modest interest rate increases are a possibility here. Consumption growth continues to lag investment-led growth in China, but it was positive to see private sector fixed asset formation outpace public sector investment in the latest economic data. Sovereign balance sheets across Asia remain strong, as fiscal stimuli have generally been less extensive than in the West.
Florian Weidinger, Hansabay