Liontrust GF Asia Income Fund

Q2 2018 review

Summary

 

  • Trade tariff hostilities between China and the US cause a reversal for equities in the second half of the quarter following strong start.   

 

  • China is well placed to deal with trade dispute but we continue to believe that there will not be a full blown trade war between the two countries.

 

  • Recent elections has seen a significant change in government for Malaysia, with the Barisan Nasional Party losing its majority for the first time in 61 years.

 

  • We added Indonesia’s ITMG to the portfolio. We think the coal miner is insulated from domestic issues given its predominantly export exposure.


Performance

Q2

Since launch

Liontrust GF Asia Income Fund -4.7% 7.5%
MSCI AC Asia Pacific ex-Japan index -3.6% 19.7%
MSCI AC Asia ex-Japan index -5.4% 20.0%


Source: Financial Express, as at 30.06.18, total return (net of fees, income reinvested), B4 US dollar share class. B4 share class launched on 23.06.15.

The second quarter was a volatile one for Asian equities. Equity markets peaked on 7th June, then fell sharply over the next three weeks. The reversal in equity performance seemed to be largely driven by Donald Trump’s increasing rhetoric, and eventually his actions, on trade tariffs. As mentioned in previous quarterly reports, we think it is unlikely that a full blown trade war would be allowed to escalate because the impact will be so clearly detrimental to all parties involved. This aside, we have also always believed that there would be rising tension in the approach to the United States’ mid-term elections, which take place in November. Trump can afford to pander to a domestic voter-base in the current positive economic environment (US GDP growth in March accelerated to 2.8% growth from the previous year) and recent global muscle-flexing appears to have increased his popularity at home.

 

Beyond that we have also always said that while China is relatively well-placed to navigate a trade dispute, we hope the leadership will see the value in some strategic concessions rather than seeking aggressive reprisals. It already has made some minor concessions to the current US administration rather than encourage a trade war [1], and we would hope these may be accelerated or extended.

 

While China has matched the United States’ tariff proposals with calm rhetoric to date, it has also pledged to open up areas of its economy. “China will vigorously push forward the reform and opening-up of the financial sector, significantly relax market access restrictions, create a more attractive investment environment, strengthen the protection of intellectual properties and actively expand imports,” said Yi Gang, Governor of People’s Bank of China. This was reiterated by Xi Jinping.

 

And we believe that some such concessions are needed for fairness. We would like to see China open up its services sector such as healthcare, education and finance to foreigners. It could also address US concerns on technology transfers and entry barriers. These all seem to be reasonable appeasements to make, as currently the rules are unjustly in China’s favour.

 

Running against our longer-term positive outlook, recent developments have taken things further and also broader than expected. With potential tariffs on European autos and a further future levy on US$200bn Chinese goods, Trump is angering more allies than we would have expected, but it does not remove our base case that at some point in the coming months the rhetoric will be reined in.

 

As the saga develops, we are focusing on our longer-term expectations of a benign outcome, and not trying to predict short-term political developments. A microcosm of the investment difficulties in assessing expectation was shown by ZTE, one of China’s largest telecommunications equipment exporter. Initially the company was driven towards bankruptcy for breaching US sanctions as America denied access to procurement of important components from US manufacturers. Trump then threw it a lifeline, overruling domestic agencies, and removed the ban. ZTE resumed trading and fell 41% after it agreed to pay $1.4bn as part of a settlement agreement.

 

Away from trade there have been other significant geo-political developments. Kim Jong-Un met with both Park in South Korea and Donald Trump in Singapore, agreeing to de-nuclearise the Korean peninsula. Although we are sceptical with the likelihood of achieving such an outcome, we welcome the development from a low-point earlier in the year. We do not believe this to be significant in an equity context, however, as we think the longer-term North Korean issue is largely ignored by markets, which have grown used to the background noise which has been going on for over a decade.

 

In Malaysia the repercussions of the 1MDB embezzlement scandal changed politics. On 9th May, the general election gave a majority government to the Pakatan Harapan party, the first time in 61 years of rule since independence that the Barisan Nasional Party had ceded control. Mahathir Mohamed, who had switched parties, is once more Prime Minister at a ripe old age of 92, replacing Najib Razak. Since the election he has been working to reduce widespread corruption, and in time intends to reinstate his former adversary and now partner, Anwar Ibrahim, who had stood against the previous establishment and was previously incarcerated under what most believe to have been political issues. While it is early to see what will happen, it is a significant shift for the country which has lagged the prosperity enjoyed by the rest of the region.

 

Politics has spilled into economics to some degree. The rising US interest rate environment, combined with a concern about trade wars impacting growth, gave us the sort of ‘risk off’ fall in equities that was last seen during 2013’s taper tantrum. This led to concerns about potential international capital flight, particularly important in those countries dependent on foreign funding of current account deficits, such as India and Indonesia. A corresponding fall in currencies there has forced increases in local interest rates.

 

We used this weakness as an opportunity to increase our commodity exposure by buying ITMG in Indonesia, a coal miner which exports the majority of its coal and hence should be protected from such domestic issues.

 

Otherwise the impact as yet has been limited. China PMI continues to indicate expansion, and overall data has been resilient, with growth remaining stable and inflation only picking up in Indonesia, India and the Philippines.

 

Looking forward our base case remains that Trump’s actions are likely to follow a similar trajectory to those with North Korea: while he is willing to raise temperatures as things progress, he is unlikely to actually pursue things to a violent end. With this in mind, we remain relatively positive the overall global growth scenario, while acknowledging that risks have risen. Our most vulnerable positions are Taiwanese technology names, a significant part of our overall portfolio, but given how hard it would be to remove them from the technology chain we think much of any tariff impact will be passed on to the consumer. We do expect more volatility as we approach the mid-term elections, however.

 

The Chinese proportion of our portfolio has little direct exposure to Chinese exporters, but as we saw right at the end of the quarter it can be hit by market sentiment about exports and Chinese growth. We would see sell-offs such as these more as opportunities than longer-term threats. It is also worth highlighting that China has many things it can do to aid the economy in the run up to a full-blown trade war. It has already reduced its reserve rate requirements, but can also ease property tightening measures and lower interest rates. We would approve of these in a difficult environment. More controversially (and less wise in our view) it could remove some of the deleveraging policies and slow some policies addressing environmental and overcapacity concerns.

 

With these elements in mind we expect to see positive returns from Asian equities over the coming twelve months, as 12.5x forward PE with double digit earnings growth and a yield approaching 4.5% seem a compelling combination.

 

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

 

Jun-18

Jun-17

Jun-16

Liontrust GF Asia Income B4 Acc USD

5.8

17.3

-11.7

 

Source: Financial Express, as at 30.06.18, total return (net of fees, income reinvested), B4 US dollar share class. Discrete data is not available for five full 12 month periods due to the launch date of the portfolio


[1] November 2017 – President Xi Jinping offered a $250bn business deal to President Trump during his visit to Beijing; January 2018 – Vice Premier Liu He, China’s top economic policy maker, began his speech in Davos by offering to further open up the services sector and property rights protection; March 2018 – Premier Li Keqiang said that China will protect intellectual property rights and abandon the policy of ‘voluntary’ technology transfers.

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. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

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.  The Fund invests primarily in Asian companies, which may be less liquid than companies in more developed markets.

Disclaimer

This content 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. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. 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.

 

Thursday, July 26, 2018, 3:03 PM