Liontrust GF Asia Income Fund

Q2 2019 review

Summary

 

  • Trade wars have gone on longer than expected so they have had a greater impact than we would have hoped.
  • The current slowdown of data (particularly trade related) may be skewed by people having dragged forward exports from China to avoid tariffs that were looming last year.
  • Aside from trade wars the most important market development was the fall in global yields.
  • Two elections, in Australia and India, were positive for equities in the period, although we remain of the view that the market already reflects greater improvements in India than are likely in the medium term, and have not increased our position.

Performance  Q2 YTD  Since launch 
       
Liontrust GF Asia Income Fund  -1.3%  8.9% 7.5%
MSCI AC Asia Pacific ex-Japan index  0.7% 12.3% 20.7%
MSCI AC Asia ex-Japan index -0.7% 10.7% 19.4%


Source: Financial Express, as at 30.06.19, total return (net of fees, income reinvested), B4 US dollar share class. B4 share class launched on 23.06.15.

The second quarter for the Asia Income Fund was reminiscent of the third quarter of 2018, with trade wars again dominating market movements. These played out in three parts.


Initially April began with broadly positive numbers coming out of China: manufacturing data was at an eight month high; China’s Purchasing Managers’ Index (PMI) rose back above 50 (50.8) after three months of contraction; exports rebounded; GDP data was in line with expectations while both industrial production and retail sales exceeded them. Trade talks also seemed to be going in a positive direction. Although Taiwanese exports fell in March, they fell at a lesser pace than the previous month which was better than expected. This was reflected by strong equity market performance.

The mood switched, however, as Trump announced that he was aiming to include Huawei on a list of companies restricted from receiving technology exports. He also made greater noises about the US’s intention to increase tariffs to 25% from 10% on US$200bn of Chinese products at the end of June. This initiated a sell-off in May. Trump simultaneously threatened tariffs on Mexico and Vietnam (and Europe) for similar treatment.

The Vietnamese addition was interesting as his rationale seemed directly linked to exporters opening production bases in the country. While we think new facilities will continue to be based there, as everyone has been looking for secondary facilities outside China, it does lessen the need to rush production overseas. There is little point in finding a cheap alternative if it too will be hit by punitive tariffs.

There was a further change in tone towards the end of the month as Trump first announced that he would look for a long meeting with Xi Jinping at the G20 in Japan, then announced that the talks had been very positive. The outcome was better than expected as he also announced temporary respite for Huawei. He has form here, as a year ago he also banned technology exports to another Chinese company, ZTE, then revoked the decision. Both changes of heart seem to have been directly connected to meetings with Xi Jinping, as potentially did the curtailing of the Hong Kong US ambassador’s final speech. He had promised a lambasting for Chinese treatment of the province, but on the day appeared to have been toned down at the request of the United States’ administration.

As with the third quarter of 2018, our portfolio underperformed as the rhetoric about trade wars became the dominant driver of equities, but has significantly recovered in the first two weeks of July as tensions have eased. Markets behaved as in a typical risk off environment. Australia outperformed, and within it the higher yield plays – banks had a rebound – but otherwise the healthcare sectors (typically defensive) and real estate (dominated by Real Estate Investment Trusts) have been the biggest contributors. Likewise large caps outperformed. And while we think that such politics will continue to cause volatility to spike, particularly within the Taiwanese technology supply chain, we still see compelling value in the companies that we own in that area.

Overall as the trade wars have gone on longer than expected so they have had a greater impact than we would have hoped. We also believe the current slowdown of data (particularly trade related) may be skewed by people having dragged forward exports from China to avoid tariffs that were looming last year. This would naturally lead to inventories unwinding now, reflected by lower immediate sales, while the comparisons against last year are tough as they had excessive sales.

This cannot detract from the facts that all exports are also being pressured by slowing global growth, as evidenced by the fact that Korea’s exports are slowing faster than China’s. Capex is also weakening in China, with infrastructure spending flattish and property developers still finding credit scarce. The Chinese government is showing little signs of desire to re-accelerate shadow banking loans (where deleveraging was targeted) or property, where the government seems keen to avoid excessive investment. This makes the potential for financing long term infrastructure projects (including some forms of social housing) one of the most likely ways to bolster growth. Maybe the stronger local government special bond issuance is a sign that this is already taking place.

Aside from trade wars the most important market development was the fall in global yields. US 10 year Treasury yields fell below 2%, in Australia they went to new all-time lows, and in India the RBI cut rates twice by 25bp, with a more accommodating outlook. In part yields were impacted by Fed Chair Powell’s shift away from a strong tightening bias within the United States to one where markets are now pricing in two cuts later this year. While this has not suited us there was a swift reversal at the same time as the G20 meeting. Yields in the US jumped back up again from 1.97 to 2.13 and in Australia from 1.27 to 1.43. As this happened some of the recent underperformers within our portfolio, Lite On, Minth and Tianneng have seen a swift recovery. Electronics names and, interestingly, bond proxies have done well, but the main benefit to the portfolio was the recovery in technology companies in Taiwan.

The other key events over the period were two elections, in Australia and India, which were positive for equities. In Australia the federal election unexpectedly returned the incumbent minority government, which markets liked as the Labour opposition had certain policies that could have hurt investors. In India, the BJP under Modi achieved a greater majority than expected, importantly making India’s desperately needed on-going reform a greater possibility. Although positive, the Indian stockmarket outperformed immediately but gave back most of its gains in the following weeks. We remain of the view that the market already reflects greater improvements than are likely in the medium term, and have not increased our position.

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

 

 

Jun-19

Jun-18

Jun-17

Liontrust GF Asia Income B4 Acc USD

0.0

5.8

17.3

 

Source: Financial Express, as at 30.06.19, 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


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.

Wednesday, July 24, 2019, 2:01 PM