Liontrust Asia Income Fund

Q3 2019 review

Summary

  • Third quarter Asian equity market returns were less affected by trade rhetoric than during first half of 2019. This was a boon to the Fund as a number of the second quarter’s weakest holdings made significant recoveries.
  • We remain of the view that trade tensions – while overall a negative for the region – will primarily affect longer-term regional capital allocation rather than have the shorter-term detrimental impact on corporate earnings that equity markets appear to have priced in.
  • The situation in Hong Kong is clearly volatile, but as the portfolio’s Hong Kong-listed shares are almost entirely exposed to mainland China rather than Hong Kong’s economy, the impact to the portfolio has been minimal.
  • We have altered our portfolio to be more precise in the exposure to domestic and government-sponsored demand in China, and continue to target specific areas of technology within exporters.
  • China celebrated its 70th anniversary of the PRC during the quarter. Read our digital booklet (“Communism Capitalism and its watershed moment”) to find out more about the country’s long-term economic transition and our view of the associated investment opportunities.


 Performance  Q3 YTD Since launch
 Liontrust Asia Income Fund, institutional class  2.3%   12.2%  90.8%
 MSCI AC Asia Pacific ex-Japan Index  -0.8%  11.4%  80.9%
 MSCI AC Asia ex-Japan Index  -1.4%  9.3%  80.6%


The Fund’s income yield over the 12 months to 30 September 2019 was 5.5%, well in excess of its target of 3.2% (110% of the yield of the MSCI AC Asia Pacific ex-Japan index).


Source: Financial Express, as at 30.09.19, total return (net of fees and income reinvested), bid-to-bid. Fund launched on 05.03.12.

 

On Friday, 30th June, US President Donald Trump and Chinese President Xi Jinping agreed a trade war truce, ceasing escalation of tariffs while resuming negotiations. Talks were to take place the following day at Osaka’s G20 Summit. Equity markets took the news well, and from then on returns seemed to be less driven by trade rhetoric (or tweets) than they were for the first half of the year. This has been a bonus for the Asia Income Fund, as some of the weakest companies in the second quarter made significant recoveries in the third. Xinyi Glass, SITC International, Minth and Man Wah stand out as companies whose share prices rebounded strongly.

This doesn’t take away from the fact that news overall for the region - whether geopolitical, economic or corporate – tended to be bad. June’s truce turned out to be a lull in combat rather than the end of the war. Trump made positive noises, indicating that he might remove restrictions on American sales to Huawei and talking of resisting tariff implementation, but a short while later the tariffs were in fact imposed. Implementation dates were then altered, then altered again. China retaliated with its own tariffs on US goods. As we write, the situation is calmer, with progress seemingly made in the latest round of trade talks concluded on 11th October. More importantly, this time Chinese mid-caps have not been so badly hit whenever news has turned for the worse.

It is also possible that the more phlegmatic market response was a reflection that these issues no longer affect China alone. Trump also threatened Vietnam and targeted Europe, and Japan is continuing its recently engineered spat with South Korea. While we would rather the trade tensions went away, we remain of the view that the impact will likely be a reallocation of capital regionally, rather than an immediate impact on corporate earnings (which is what the markets appeared to have been pricing in).

Alongside the trade wars are the ongoing demonstrations in Hong Kong. They are obviously serious and causing significant damage to Hong Kong’s economy, both due to immediate disruption to businesses based there and through mainland Chinese being less willing to visit the city. Hong Kong’s GDP fell 0.4% in the second quarter and when data for the third quarter is released it will almost certainly confirm a recession is underway. We believe that these rallies are primarily a result of increasing inequality in the city, with housing unaffordable and good jobs increasingly hard to come by (at 0.54 and rising, the city’s Gini coefficient, a measure of inequality, is worse than that of either mainland China or the US).

The Hong Kong government has now announced some measures to try and address such issues, increasing housing and land supply, and bolstering public spending, but these will take time before any impact is felt. In the meantime we do not expect the Chinese to intervene, but obviously the situation remains volatile. As the portfolio’s Hong Kong-listed shares are almost entirely exposed to mainland China rather than Hong Kong’s economy the impact to the portfolio has been minimal.

Although Hong Kong’s economy has been impacted by these specific events, Asia is also seeing evidence of a slowdown at both country and corporate levels, most visibly in the weakening services side of the region’s largest countries, which is feeding through to some poorer corporate results.

While obviously negative, this should be viewed in the context of a global economic slowdown which has led the IMF to a series of cuts in its growth forecasts. This highlights the fiscal and monetary strengths of the region. China, South Korea, Australia, New Zealand, Thailand, India and Indonesia all cut interest rates at least once in the third quarter, and there are increasing signs that fiscal stimulus will also be increased. Australia, China, India and Taiwan have all already announced their own style of easing measures.

As always, China’s scale makes its actions more important than most. Data there was poor, with factory inflation negative, industrial production growth at its lowest since the 2008 financial crisis level and export growth continuing to weaken, as tariff uncertainty and slowing global growth take their toll. The breadth of the decline is highlighted in the third quarter Beige Book, which shows manufacturing, property and services sectors all worsening even as borrowing picked up. Manufacturing revenues, profits, volumes and sales prices fell in double digits compared to the previous quarter, while service sector revenue and profits fell compared to 2018 and hiring slowed.

We are seeing a measured government response to this environment, with slightly lower lending prices and a targeted push to fund smaller and medium enterprises. Happily the government is resisting the temptation to repeat mistakes and allow another flood of money into either property or local government debt. We hope that this continues, but the severity of the slowdown has made us more reflective of the portfolio’s exposure to the beneficiaries of government policy.

In this respect, the portfolio is already well positioned due to its focus on companies facing the domestic consumer or government infrastructure projects. We did, however, make a change by selling Man Wah, an exporter of sofas, and Texwinca, an exporter of yarn and fabric. We used the funds to buy Dali Foods, a Chinese food and beverage company with market leading positions in several categories.

And not everything is negative for the region. As Trump has shouted louder and longer than we expected, companies have been forced to address the longer-term risk that he poses. Taiwanese companies have been amongst the biggest beneficiaries, as its technology companies there already tend to have sufficient facilities, sitting within an industrial hub, to shift US export production swiftly from China. At the same time China has shown increased commitment to provide 5G coverage, and a number of companies are benefiting from the increased demand as base stations are put in place. Machinery and electrical equipment make up half of Taiwan’s exports, which overall rose 19% to America while falling 9% to China in the first eight months of this year. Our Taiwanese exposure to these factors, in particular King Yuan and ASE, both of which test 5G components contributed significantly to outperformance over the quarter. We also bought Merry Electronics, a specialist in headphones and speakers, which has recently seen booming sales in true wireless stereo headset sales.

Another support for growth is rising infrastructure spending across the region. The Australian federal government is planning to spend a record A$100bn over the next 10 years on infrastructure, an increase from A$75bn budgeted earlier. We bought Downer, an Australian infrastructure maintenance services provider focused on long term service contracts, especially with the government.

A further boost comes from Asia cutting tax rates to support growth and consumer spending. The latest significant move was by India, which cut the effective tax rate from 34% to 25% for all corporates and to 17% for new manufacturing firms. This could attract firms planning to shift manufacturing facilities out of China amidst the ongoing US-China trade war, in addition to incentivising domestic companies to bring forward capital expenditure plans.

While regional risks may remain elevated for some time, we believe that markets have already factored in many of these negatives, but have not rewarded all of the positives that exist in the current environment. While we have altered our portfolio to be more precise in the exposure to domestic and government-sponsored demand, and to target specific areas of technology within exporters, we still see plentiful opportunities where companies are paying good dividends with longer-term growth potential.

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

 

Sep-19

Sep-18

Sep-17

Sep-16

Sep-15

Liontrust Asia Income I Inc

7.7

-0.1

13.1

40.9

-4.7

MSCI AC Asia Pacific ex Japan

4.0

4.9

16.8

37.7

-8.4

IA Asia Pacific Excluding Japan

5.7

3.8

15.7

36.9

-7.9

MSCI AC Asia ex Japan

2.2

4.4

18.8

36.2

-6.2

Quartile

2

4

4

2

2

Source: Financial Express, as at 30.09.19, total return (net of fees and income reinvested), bid-to-bid, institutional class.

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.

Monday, October 21, 2019, 2:34 PM