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November 2020

It has been an eventful month for equity markets, and for sure it did not play out the way investors had anticipated, even in their wildest dreams. The fact that three COVID-19 vaccines had been announced back to back triggered a powerful surge across all equity markets which had their best month since January 1975. The MSCI World Index gained 12.7% in November. Countries that suffered the most from the pandemic were those that performed the best in November, such as Italy, Spain, Belgium and France. The fact that the results of the US presidential election did not give rise to civil unrest also certainly helped.

In Asia it was a very similar picture: Thailand and Singapore which had been the worst performers of 2020 until the end of October were the best performers in November, up 17.9% and 15.8% respectively. In this context, China came out as being the worst performer across Asia, the Shenzhen and the Shanghai stock exchanges having gained 2.3% and 5.2% only in November.

The availability in the coming weeks or months of a vaccine suddenly gave hope to investors that had been battered by lockdowns and by their economic impact. Even though access to these vaccines will take time, investors can now start to price in a return to normality sometime in 2021, leading to some rotation from the best performing markets (US Tech and China) to the battered ones (South East Asia, India in our investment universe). However it does not change our view that unlimited quantitative easing in the developed world will have a lasting impact on interest rates differentials across the globe, and that COVID-19 will prove to have accelerated the rise of China on the global economic map. The RMB is fast becoming a must-own currency as a result.

Despite so many tariffs having been imposed by the Trump administration over the past two years, Chinese exports have risen to their all-time high of 14.2% of global exports in August 2020, up from a recent low of 12.9% in February 2019. According to the IMF, China’s share of the world GDP on a Purchasing Power Parity basis (PPP) has risen from 7.0% in 1999 to 17.4% in 2019 when the US share has declined from 20.5% to 15.9% over the same timeframe. It is extremely likely that the pandemic has widened that gap in 2020.

It is too early to guess how the Biden administration will handle its relationship with China, other than assuming that it will be less confrontational and more diplomatic. One critical aspect is whether the US will manage to create a united front with the European Union when dealing with China. The answer to that question lies in Berlin, in our views. Germany has always been pro-business oriented and less dogmatic on touchy issues such as human rights than France and other European countries. Germany is certainly not going to run the risk of jeopardising the very strong foothold it has built over the past century in China, be it in machinery equipment (Siemens has been doing business in China since 1872) or in automotive for the sake of pleasing the US by joining an anti-China coalition. Germany is also the only major developed country that has still not taken any official position on 5G and whether it is prepared to buy Huawei equipment or not.

Shortly after Joe Biden won the US presidential election, the American Chamber of Commerce in Shanghai published the results of a study it did among its members: 82.4% of those have no plan to move production out of China in the next three years. This is in sharp contrast to the widely spread idea that foreign companies were willing to move capacity away from China and in favour of countries such as Vietnam or India in order to reduce their dependence on the Middle Kingdom.

Another key event in November was the last-minute cancellation of the largest IPO ever, the Ant Group IPO which we have discussed over the past months. It is our view that China’s leadership realised that Ant’s business model was to revolutionise the way traditional banks operate in China (i.e. lend money by taking collaterals) and replace it with statistical analysis of borrowers’ credit risks using big data and artificial intelligence. As Ant is not a bank, its direct exposure to any borrower’s loan is currently only 2%, the remaining 98% being a risk undertaken by the lenders to Ant Group, i.e. the traditional Chinese banks. Given the size of Ant Group, its open ambition to take business away from the banks (which are all State-owned) and the nature of its business model, the Central government realised that it had to take immediate action. Ant needs to be regulated as a bank and be forced to expose its balance sheet to 40% of its clients’ borrowings to prevent any blow-up. But a bank does not get the same valuation multiples as a Fintech.

Cancelling such a high-profile IPO at the last minute was an embarrassment for China. But letting the IPO proceed would have been far more than an embarrassment if millions of Chinese citizens having subscribed to Ant’s IPO had to suffer a valuation de-rating triggered by the banking regulator imposing all of a sudden drastic rules. It could have become a social risk, which is what the leadership always wants to prevent at all costs. We are also guessing that the 2008 sub-prime crisis in the US that brought down Bear Stearns and Lehman Brothers before it was backstopped by the Fed and the US Treasury at the price of a global recession was very much in Xi Jinping’s mind as it is now confirmed that the decision was made by him.

On the macroeconomic front, all Asian countries announced their GDP numbers for the third quarter. From these numbers we can derive that the worst is behind all of them, however with various degrees of success and different pace of recovery. Thailand for instance which has managed to eradicate totally the virus is not going to see its economy rebound strongly as long as tourism remains closed. Its GDP growth was -6.4% YoY in Q3. The Philippines has seen some improvements from Q2 to Q3 but remains the laggard of Asia in terms of recovery. Its growth stood at -11.5% YoY in Q3. Indonesia is gradually getting back on its feet with a GDP growth of -3.5% YoY, but the recovery is not expected to be a fast one. Malaysia has seen a strong sequential rebound in Q3, and despite being still in negative territory at -2.7% YoY, economists expect the rebound to carry on steadily. India has also surprised on the upside with a strong recovery in the latest quarter, but its GDP is still down 7.5% YoY. Korea also had good growth in Q3, but is still not back to where it was prior to the outbreak. Its GDP growth was -1.3% YoY in Q3. Then come Taiwan and China that are two of the very few economies in the world (if not the only ones?) that are showing year-on-year growth at +3.3% and +4.9% respectively. It is worth repeating here that Taiwan without dispute did the best job in the world to manage the pandemic since its outbreak in Wuhan at the end of last year.

Focusing on China, the November PMI data beat analysts expectations at 52.1 for the official manufacturing PMI (consensus was 51.5) and 56.4 for the official non-manufacturing PMI (consensus was 56.0). The Caixin manufacturing PMI that tracks down better the private sector showed the same trend, reaching 54.9 in November (consensus was 53.5), its highest level since November 2010. All components of that index improved, including the export orders sub-PMI that rose from 51.0 to 53.3 and the employment sub-PMI that reached its highest level since 2011.

As the Chinese economy keeps on accelerating, two comments were made that are worth highlighting: Li Keqiang, China’s premier said that China “will absolutely not pursue a trade surplus” and “wants to achieve trade balance”. In other words, China will not engage in any competitive devaluation of its currency, and will probably let it appreciate to reduce the existing trade surplus. The second comment was made by Lou Jiwei, the former finance minister who remains very influential. He stated during a recent conference that it was time for China to achieve an “orderly exit” from its loose monetary policy, meaning that a rise in Chinese interest rates could happen rather sooner than later. This would likely exert further upside pressure on the RMB.

CHINA PORTFOLIO

La Francaise JKC China Equity saw its NAV per share rise by 3.4% in November when the MSCI China Free index rose by 2.7%. Since the start of the year, the fund is up by 21.8% when the index is up by 23.3%. The fund performed better than the index in November. Top attribution contributor was our underweight in Alibaba. The fund has a 6.4% exposure to the Hong Kong listed shares that went down 10.8% when the benchmark Alibaba ADRs listed in New York with a 17.9% weighting went down 13.6%. SITC International (+25%) and China Resources Beer (+19.1%) also performed well. At the other end of the spectrum Hangzhou Tigermed, Techtronics and Yili hurt the relative performance. During the month, we continued to add to Bilibili and to C&S Paper. We also added some Hefei Meiya and Shanghai Henlius. We took some profit on China Resources Beer and SITC International, and we moved further away from the big benchmark names Tencent and Alibaba. Finally we initiated Shenzhen Mindray.

Founded in 1991, Mindray is a top Chinese medical device manufacturer providing comprehensive solutions in Patient Monitoring and Life Support (PMLS), In-Vitro Diagnostics (IVD) and Medical Imaging areas. Mindray is expected to maintain its top position in China given the company’s broad product mix that satisfies the demand from both low and high-end markets, and its proven product quality and R&D capability. The company has a strong sales, service and distribution team with extensive coverage of primary healthcare facilities. We also like Mindray’s high brand recognition in high-tier hospitals in China, and we believe Mindray’s fast reaction during the combat against Covid-19 in overseas markets combined with their excellent service and product quality has helped them grab the once-in-a-lifetime opportunity to become a real global leader. We are aware of the expensive valuation of the stock, which is why we only hold it in the opportunity basket of the fund with a 2% weighting.

ASIA PORTFOLIO

La Francaise JKC Asia Equity saw its NAV per share rise by 4.4% in November when the MSCI Asia ex-Japan index rose by 8.0%. Since the start of the year, the fund is up by 19.6% when the index is up by 14.9%. The fund gave back some outperformance in November even though the absolute return remained respectable. The top attribution contributor was our underweight in Alibaba. The fund has a 4.2% exposure to the Hong Kong listed shares that went down 10.8% when the benchmark Alibaba ADR with a 8.3% weighting went down 13.6%. SITC International (+25%) and BTPS (+15.6%) also performed well. Voltronic Power, Hangzhou Tigermed, and Vitzrocell hurt the performance. During the month, we continued to add to C&S Paper. We took some profit on Hansol Chemical, BTPS, China Resources Beer and SITC International, and we moved further away from the big benchmark names TSMC, Tencent and Alibaba. Finally we initiated Poya International.

Poya is a unique retail chain in Taiwan. The company has 265 stores all over the island, 250 of them being Poya stores and 15 being Poya Home. The retail format of Poya stores is similar to a small department store, but focusing on female related offerings, including cosmetic and beauty products which make up over 50% of the total SKUs. Poya entered the home improvement market in 2019 by creating a second retail brand, Poya Home. Poya Home targets mainly male customers. Its marketing, procurement, and operations are independent of Poya. The management aims to operate 220 Poya Home stores and 350 Poya stores by 2025. Poya is a company that we have followed for six years. We like the management’s track record over the past decade as they have demonstrated operational excellence in a very competitive industry and built up entry barriers to fend off further competition, especially coming from the big foreign brands (Sasa, Sephora). We also like the fact that they now have two growth engines targeting two different groups of audience. Its low correlation with other portfolio companies is a plus.

The information contained herein is issued by JK Capital Management Limited. To the best of its  knowledge and belief, JK Capital Management Limited considers the information contained herein is accurate as at the date of publication. However, no warranty is given on the accuracy, adequacy or completeness of the information. Neither JK Capital Management Limited, nor its affiliates, directors and employees assumes any liabilities (including any third party liability) in respect of any errors or omissions on this report. Under no circumstances should this information or any part of it be copied, reproduced or redistributed.

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