Liontrust GF Asia Income Fund

February 2020 portfolio changes

Since our 6 February update, the total number of confirmed cases of Coronavirus (COVID-19) has continued to rise. We do not have any foresight into how long the virus will spread before some containment is achieved, and until that happens there will obviously be an impact on earnings for companies affected.

 

Some revenues, like those lost from tourists who did not travel over Chinese New Year, will never be recovered but we hope that others, particularly those where the disruption from the virus has postponed demand, will likely bounce back far more swiftly. This rebound is likely to be aided by substantial monetary and fiscal stimulus in China and other countries. In addition, there may be some longer-term structural changes such as a step change in the rate of the shift to online consumption.

 

We have made minimal changes to the Liontrust Asia Income portfolio as a result of the Coronavirus crisis. What we have done is to add two stocks that we had identified before the outbreak of Coronavirus - Huaxin Cement and Cifi - and were excessively punished in the initial sell-off after Chinese New Year.

 

As its name suggests, Huaxin Cement forms part of a Chinese cement industry that we think offers a broad play on infrastructure investment in China. Local governments had already raised money through bonds with such spending in mind, but it is now also likely to be brought forward as a way to kick-start the economy following the sharp drop in activity levels caused by Coronavirus containment efforts.

Huaxin Cement is based in Wuhan and has, along with swathes of China’s industrial landscape, been hit heavily by the lockdowns enforced to battle the spread of Coronavirus. However, we think that cement production is more likely to have been postponed rather than cancelled.

Following the sell-off in Chinese (and global) equities, we bought Huaxin’s A shares – the first to be included in the Fund – because their valuation looked compelling at a price/earnings ratio of 7x. The company is cash generative and offers a prospective dividend yield of 5%.

Cifi also stands to benefit from accelerating government stimulus targeted at encouraging a recovery in the property market after the effects of the coronavirus have diminished. It is a property developer focusing on Tier1 and Tier2 cities in China.

 

Larger developers such as Cifi are gaining market share and sales are expected to be strong, driven by increasing urbanisation, rising affordability and Hukou reforms. Inventories are also at a healthy level. Cifi was bought on an attractive valuation of around 5x forward price/earnings, with over 20% forecast earnings growth, and offers a dividend yield of more than 5%.

 

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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.

Friday, March 6, 2020, 2:25 PM