Asia Fund – Fund Manager Update

Global market sentiment deteriorated at the end of February, as the sharp and sudden rise in the US Treasury yields induced risk-averse investor behaviour. We believe that this is purely temporary and the positive case for EM equities remains intact. Despite the external headwinds, the relevant Emerging Asian stock index rose 1.4% in USD in February.

Economic growth momentum in China steamed ahead, as both the official and Caixin manufacturing PMIs (50.6 and 50.9 in February, respectively) continued to signal the expansion of industrial production. Both gauges indicated that the growth of new domestic orders remained robust, despite headwinds due to Chinese New Year.

Earnings momentum in India kicked into an even higher gear in 4Q20. According to Motilal Oswal, 57% of the companies in their universe beat estimates, which resulted in the second consecutive quarter of significant upgrades in corporate earnings in India. Profits after tax for the Nifty 50 index rose 22.3% in 4Q20, surpassing broker expectations of 7%. After two consecutive quarters of economic contraction, annual real GDP growth in India returned to positive territory in 4Q20 in line with our expectation. The rate of GDP growth reached 0.4% YoY, whilst gross value added rose 1% YoY.

The macroeconomic landscape remained sound in Vietnam, according to the February datapoints. Retail sales growth was 5.5% YoY YTD in February, whilst the manufacturing PMI rose from 51.3 to 51.6. Meanwhile, real GDP growth in Indonesia was -2.2% YoY in 4Q20, as mobility restrictions remained in place to slow the spread of the coronavirus. To boost the domestic economy, the central bank lowered the key interest rate by 25bp to 3.50%. Business sentiment and economic activity in the Philippines improved, according to the manufacturing PMI, which was 52.5 in February. We continue to see significant unappreciated value in the Indonesian and Philippine stock markets.

In February, we added Zhongsheng (China, car dealership; ESG rating “C”) to the Alquity Asia Fund. Zhongsheng is benefitting from longer-term structural trends, such as rising disposable income. The risk-reward profile of the stock was compelling at this juncture. We exited Yoma (Myanmar, real estate), due to the macroeconomic outlook’s significant deterioration triggered by the military coup. We also exited KINX (South Korea, internet infrastructure), due to an adverse change in the investment thesis.