Liontrust Asia Income Fund

Q1 2019 review

Summary

 

  • Much of the quarter’s return has to be ascribed to two factors: an improving relationship between China and the US; and the effective reversal in US monetary policy. The more important of these is the thawing international relations between the world’s two largest economies.
  •  The biggest positives for the portfolio came from Taiwan, including Taiwan Cement and technology stocks Wistron, Lotes and Taiwan Semiconductor Manufacturing Company.
  • Looking forward, we remain positive on the outlook for Asian equities. We still think that the outlook is improving, but do not expect that to be reflected in companies’ earnings until later in the year.
  • Valuations for the region on aggregate are back to historical averages after the recent run, but there remains significant valuation divergence between individual markets.

Performance Q1 Since launch
Liontrust Asia Income Fund, institutional class 8.00% 83.70%
MSCI AC Asia Pacific ex-Japan Index 8.90% 76.80%
MSCI AC Asia ex-Japan Index 8.90% 80.80%

Source: Financial Express, as at 31.03.19, total return (net of fees and income reinvested), bid-to-bid. Fund launched on 05.03.12.

 

For investors, January quickly sloughed off the misery of the second half of 2018. Much of the quarter’s return has to be ascribed to two factors: an improving relationship between China and the US; and the effective reversal in US monetary policy. The more important of these is the thawing international relations between the world’s two largest economies. We always believed that last year’s equity sell off was, to a large degree, mere collateral damage from the US trade spat with China. We did not think the imposition of 25% tariffs on all goods exported from China to the US was likely, as had been threatened from 1 March this year, but we were still glad to see these additional tariffs postponed ‘indefinitely’.

While it would hurt both parties if trade wars escalate further, and we do not believe the US would achieve much by doing so, we acknowledge that Donald Trump has proved unpredictable and could surprise further as the negotiations progress. As we write, however, all reports from both sides indicate that the process should end with some accord.

A further boost could come from current tariffs being removed; they sit at between 10% and 25% on approximately half of all goods that China sells to the US. Markets do not yet seem to have factored in any probability of this outcome, so we would not expect a sell-off if they remain in place for some time.

As for US monetary policy, markets began the quarter pricing in two rate rises in 2019, but as the outlook for US growth has slackened so have expectations for interest rates. These have fallen to the point that a cut is now expected at some point later in 2019, a remarkable turnaround. At the same time the Federal Reserve announced intentions to end its balance sheet reduction programme earlier than expected. This move is important as the current policy is effectively removing cash from the system, a form of monetary tightening (branded ‘quantitative tightening’).

Rising US rates and a stronger dollar had in 2018 provided headwinds to Asian equities and led to a repatriation of capital from Asia to the United States. Although not a certainty that Asian equities should struggle alongside a rising dollar, it is enough of a perceived wisdom for us to see the recent weakness in the dollar as removing a headwind.

With two of last quarter’s negatives removed, regional data became of much more interest to investors. The first quarter’s economic data showed initial weakness at almost every level – domestic demand sagged, exports were poor and the more forward looking Purchasing Managers Indexes (PMI) showed some despondency from company managers. Encouragingly, these numbers started to trough during the quarter and the most recent PMI’s – released for March just after the quarter end – showed a pick-up not just in China but also in many of the other Asian exporting economies.

At an individual stock level, first quarter results had a greater impact on share prices than they have for some time. Companies that disappointed were often severely punished by the markets while those that exceeded expectations were rewarded. This led to some significant price movements in a number of our holdings. On the whole, the tone of company announcements reflected a deteriorating business environment at the end of 2018, but much of this had already been factored in by investors.

The biggest positives for the portfolio came from Taiwan. Taiwan Cement’s rising profitability reflected strong demand from China and it is also a beneficiary of the ongoing stimulus that the Chinese government is looking to provide domestically. Technology companies also did well, led by Wistron and Lotes, both of which announced better results than expected. The sector in general received a boost from a Taiwan Semiconductor Manufacturing Company announcement that it was seeing a pick-up in orders in for the second quarter of 2019, driven largely by smartphone demand. Interestingly Samsung (in Korea) issued a profit warning due to low demand for memory chips a couple of days before its results, but the stock price recovered from this quickly. It appears that markets are currently looking forward to areas of improving growth, and have already priced in much of the recent lull.

Minth and China Communication Services stood out with weaker results. Minth suffered from lower sales and higher raw material costs, while China Communication Services saw margins squeezed by competition and was hurt by greater subcontracting costs. Both stocks were significant detractors from performance.

Looking forward, we remain positive on the outlook for Asian equities. We still think that the outlook is improving, but do not expect that to be reflected in companies’ earnings until later in the year. In the meantime, China’s National People’s Congress – which took place in the first week of March – gave further positives for markets. The overall aims are to provide stimulus but not to the excessive debt-laden levels of 2019. Tax cuts should amount to 2% of GDP and the private sector looks set to be the beneficiary of support. At the same time, China wants to continue to crack down on local governments’ off-balance sheet debt and increase investment into developing industries (such as artificial intelligence). We see these aims as sensible and well-balanced, and think that the stimulus is already having some success, reflected by the improvements in PMI data.

Valuations for the region on aggregate are back to historical averages after the recent run, but there remains significant valuation divergence between individual markets. For example, India remains expensive and is set for elections in April, which may lead to further volatility, we still find value and opportunity in China, and Taiwan, which remain the portfolio’s two largest country exposures.

Discrete years' performance (%), to previous quarter-end:

 

 

Mar-19

Mar-18

Mar-17

Mar-16

Mar-15

Liontrust Asia Income I Inc

3.7

2.8

36.8

-6.9

19.2

IA Asia Pacific Ex Japan

3.1

7.3

35.1

-8.1

19.4

Quartile

2

3

2

3

3

 

Source: Financial Express, as at 31.03.19, total return (net of fees and income reinvested), bid-to-bid, institutional class.

 

For a comprehensive list of common financial words and terms, see our glossary here.

 

Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in Funds managed by the Asia team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation. 

Disclaimer

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Tuesday, April 16, 2019, 11:35 AM