Follow us on Linkedin
Print Friendly, PDF & Email

February 2021

The past weeks’ market volatility was triggered by the brutal spike in US interest rates that no one had foreseen, and certainly not the Fed and the ECB that got caught by surprise. Commodities prices spiking were the culprits. Investors are now facing a dilemma. Is this spike in both soft and hard commodities going to force central bankers in the US and Europe to hike interest rates despite having repeatedly said that they would not? Is the steepening of the Treasuries yield curve the result of the Fed focusing its quantitative easing exercise on the purchase of short-dated Treasury bonds, thus keeping the shorter end of the yield curve artificially low, or is it the anticipation of a genuine economic rebound in the US?

The conundrum of central bankers at the Fed and the ECB is now in the open: After having repeatedly said that quantitative easing would not taper (it is currently running at USD120bn per month in the United States) and that rates would be kept low “for a considerable period of time” and, as far as the Fed is concerned, as long as full employment is not achieved, are they going to change their views now that the Bloomberg commodity index has gone up by 43% since its low of April 2020 and 9.2% YTD?

The fact that the US Congress was about to pass another USD1.9 trillion of fiscal stimulus should boost consumption and could add more upside pressure on inflation. We all remember how Jerome Powell did a 180-degree U-turn in January 2019 when he switched suddenly from hiking to cutting rates. He is certainly capable of another U-turn.

But inflation is not necessarily the enemy of equity markets if it runs in parallel to an economic rebound, which is precisely what Morgan Stanley anticipates with a 6.4% GDP growth forecast for the US in 2021. Hiking rates too soon may well dampen this economic rebound.

If the Fed does a U-turn and hikes interest rates, the market will further adjust upwards the risk-free rate, which will compress valuation multiples as markets have started doing in February. It will trigger a rally in the US dollar that would be detrimental to emerging currencies and to emerging markets, as has always been the case.

So, two months into 2021, we are asking ourselves this question again: What’s next? Are we going to enjoy three consecutive years of bull markets in China/Asia, as we last saw more than a decade ago? Or is 2021 going to be a repeat of 2018, a historically bad year when essentially all asset classes globally performed miserably, led by Chinese stocks? Jerome Powell and Christine Lagarde are fast becoming the most important decision makers of 2021.

When we wrote our outlook report at the start of the year, we assumed that the divergence in monetary policies between China and the rest of the world would last for at least a couple of years, pushing the RMB higher as the USD stays weak, attracting further liquidity into China despite continued US-China tension under the Biden administration. We are not yet changing this view. However, we exercise extra caution and examine our portfolio positionings amid changing risk environments to avoid the 2018 humbling experience when we underperformed because of a wrong-footed sector exposure and our underestimation of the macro event impact, i.e. the trade war, on our portfolio holdings’ fundamentals.

On the macro front, China is behaving exactly as we had anticipated: After a strong acceleration that kick-started last June, PMI numbers are now trending down. The official manufacturing PMI dropped from 51.3 in January to 50.6 in February (consensus was 51.0) when the Caixin PMI dropped from 51.5 to 50.9 (consensus was 51.1). It is true that numbers for February are difficult to analyse due to the very unusual Chinese New Year holiday we just went through, with 300 million migrant workers having been asked to remain in their factories. Nevertheless, the trend is clear: The post-Covid recovery phase is over, China has resumed its normal growth path, and no one should be fooled by the forthcoming Q1 2021 GDP number that will probably clock around a surreal +18% YoY print. A more meaningful GDP growth number is the one anticipated by economists polled by Bloomberg for the full year, or +8.4%.

Outside of China, both Indonesia and India are now running current account surpluses, for the first time in 17 years in India’s case and for the first time since 2011 in the case of Indonesia. This has had positive impacts on their respective currencies and in investors’ confidence in their post-Covid economic recovery.

Another good news was the Indian government’s release of the budget for the fiscal year 2021/22, with a budget deficit set at 6.8% of GDP. This is an expansionary budget that should boost growth, focusing on capital expenditure and infrastructure development.

As to Indonesia, the central banks cut interest rates by 25bps to 3.5% on the back of core inflation that dropped to 1.6% in January. Rates being still relatively high, the likelihood of another 25bps rate cut by the end of the year is high.

These two markets were the best performing markets across Asia in February, both up 6.5%. Our decision to overweight Indonesia and to increase our exposure to India was the right one.

Interestingly, two neighbouring countries can have different inflation paths: While Indonesia hit a core inflation all-time low, the Philippines saw a spike in prices, with inflation rising from 3.5% in December to 4.2% in January, its highest print in two years, exceeding the central bank’s target of 2% to 4%. It was driven by food inflation that reached 6.2% in January. With the Covid crisis hitting the Philippines particularly badly, a rising inflation could force the central bank to tighten its monetary policy, which would hit the economy even harder. It is not surprising that the Philippines’ stock market is the worst performing across Asia so far this year. We do not have any exposure to the Philippines at present.

PORTFOLIO REVIEW

In the first half of February, markets were robust, with the MSCI China index having gained at some point 20% YTD and the MSCI Asia 14% YTD. The sharp correction that followed was triggered by global inflation fears that suddenly pushed USD risk-free rates higher with the 10-year Treasuries shooting up to 1.52%, up from 1.05% at the start of the month. As a result, we saw high valuations stocks across the world slump, and even more in China which corrected almost 12% from its mid-February peak. The liquidity flows that Chinese equities had benefitted from which had been coming both from mainland China through the Southbound Stock Connect and from overseas suddenly reversed. Other markets across Asia corrected less but still lost 7.3% during these days.

Year-to-date, Chinese stocks are still leading their regional and global peers, gaining around 6%. The Taiwanese market also did well, having gained two months in a row and having returned 8.3% YTD. It benefited from its technology sector that has a 63% weighting in its index and that gained 14% as the world is going through a global semiconductor chips shortage. Indonesia and India’s local indices caught up with North Asia with good performances powered by heavy-weight banking and energy stocks.

Our China exposure underperformed during the month, like in January. Outperformers in January were the liquidity beneficiaries mega-caps, for which we had deliberately capped our exposure seeking better alpha elsewhere.

February was all about inflation beneficiaries (oil, commodities, and other base materials producers), banking and cyclical recoveries for which high convictions names are not easy to identify, especially at a time when China is tightening access to credit. Indeed, our China exposure tends to be structural growth stories that are not policy driven. These companies have done well over the past two years, hence their relatively more expensive valuations which suffered from multiple deratings.

The relative performance of our non-Chinese exposure did better as we tend to like financials in south Asia, and we have enough of them together with energy and material stocks that fit the themes in February.

In our 2021 outlook report, we did highlight the risk of rotation from China to South Asia and from pandemic beneficiaries to laggards. The past two months showed that we had not adjusted our China portfolio enough to mitigate this risk. We will work to improve in the coming weeks. We are also highly alert to avoid a 2018 situation when we had misjudged certain macro events’ impact on our holdings’ fundamentals as was the case with the Trump trade war.

For conviction based stock pickers like us, what is crucial is to continually assess our holdings’ operating environments with ever-changing economic, political and policy dynamics. On portfolio construction, we need to allow enough exposure diversification to ride market-style changes, sector rotations or mean reversions that happen from time to time.

CHINA PORTFOLIO

La Francaise JKC China Equity saw its NAV per share drop by 3.6% in February when the MSCI China Free index dropped by 1.0%. The cash position of the fund stood at 1.8% at the end of the month.

Top attribution contributors were SITC International, up 14.5% in February with a 5.7% average weight, Xinyi Glass, going up 15.4% with a 4.7% average weight, and Bilibili, up 15.8% with an average 5% weight. On the negative side, Hangzhou TigerMed, with an average 5.2% weight, went down 16.0%, Hefei Meiya, with an average 4.7% weight, went down 16.3% and China Resources Beer with an average 4.6% weight went down 14.6%. In terms of trades, we took some profit on Tencent, Bilibili, and SITC and added some Heifei Meiya, Aier Hospital and CICC.

On the news front, Yum China reported earnings for the fourth quarter of 2020 with core net profit up 76% YoY. Sales accelerated to +11% YoY during the quarter, mainly due to new store opening and same-store sales recovery of both KFC and Pizza Hut. C&S Paper reported preliminary financial results for the fourth quarter of 2020 with net profit up 40% YoY. Sales grew by 26% YoY during the quarter, accelerating from 18% growth in the third quarter of 2020. Net margin was 10.2% for the quarter, up 1.1 percentage point YoY but down 1.1 percentage point QoQ. Bilibili reported RMB3.84bn revenue in 4Q20, +91% YoY. The strong performance was driven by advertising business growth. Value added services revenue surpassed games for the first time at RMB1.25bn, +118% YoY, driven by 17.9mn paying users, up 103% YoY. Management raised its 3-year monthly active user target to 400mn by the end of 2023, doubling from 202mn in 4Q20. Heifei Meyer reported its FY20 preliminary earnings of RMB441mn, or -19% YoY, on the back of a flattish top-line (RMB1.5bn) mainly due to foreign exchange losses and fewer one-off gains.

ASIA PORTFOLIO

La Francaise JKC Asia Equity saw its NAV per share rise by 1.2% in January when the MSCI Asia ex-Japan index rose by 1.2%. The cash position of the fund stood at 1.3% at the end of the month.

Top attribution contributors were Hansol Chemical, up 26.4% in February with a 4.7% average weight, Aavas Financiers, up 24.8% with a 4.4% average weight and Bank BTPN Syariah, up 20.6% with a 3.7% average weight. On the negative side, Hefei Meiya, with an average 4% weight, went down 16.3%, Hangzhou TigerMed, with an average 4.2% weight, went down 16%, and CICC, with an average 4% weight, went down 11.8%. As for trades, we introduced a new name in Indonesia: Medikaloka Hermina. We trimmed some Techtronic, Leeno Industrial, Koh Young, VitzroCell Co. and Aavas Financiers and added some Heifei Meiya, China Resources Beer and CICC.

On the news front, the Taiwanese retailer Poya announced its earnings for the fourth quarter of 2020 with net profit up 5% YoY. Sales rose by 14% YoY during the quarter, as same-store sales growth was 1%. The Company had 260 Poya stores and 21 Poya Home stores at the end of 2020. Voltronics also reported its sales numbers for the month of January 2021, posting a growth of 43.2% YoY. The company had already been showing strong growth momentum over the past months with sales up 12.1% YoY in November 2020 and up 16% YoY in December 2020. Our Korean investment Hansol Chemical posted an operating profit of KRW26.8bn, +55.4% YoY, on sales of KRW159.2bn, +11.2% YoY for 4Q20. The company delivered solid results for the quarter on robust sales of hydrogen peroxide and precursors for semiconductors and displays, as well as tapes and anode binders for EV batteries. In Taiwan, testing equipment maker Chroma reported 4Q20 earnings of NTD688m. Revenue came in at NTD4.2bn, beating the Company’s previous guidance of a sequential decline on a more robust than expected system-level testing (SLT) demand. Gross profit margin declined sequentially to 46.2% (-1.3ppt QoQ) on unfavourable foreign exchange impact.

Medikaloka Hermina is our latest addition to the portfolio. Set up in 1985, it is one of the largest private general hospital chains in Indonesia, operating nationwide with a total capacity of more than 38 hospitals and 4,745 beds as of 30th September 2020. Hermina is uniquely positioned to take advantage of low healthcare penetration in Indonesia, being the early mover taking advantage of the universal health coverage roll-out through the Jaminan Kesehatan Nasional (“JKN”) scheme. The management has shown proven track record expanding the business from a strong heritage in women and children care. Their operational excellence also reflected in their ability to successfully develop new hospitals and optimise capacity while maintaining profitability. It is the only listed hospital operator that adopts a doctor-partnership business model, which has helped Hermina to recruit and retaining its medical talent pool. We like the sustainable growth and margin outlook of the company driven by new bed additions embracing more patients with a wider range of service offering targeting broader audience, as well as external acquisition potentials. The stock is trading at 28x 2021 PE ratio with 24% growth and 16% ROE. The valuation isn’t cheap, and we are aware of the liquidity risk of the stock, which is why we only hold it in the opportunity basket with a 2% weight. 

The information contained herein is issued by JK Capital Management Limited. To the best of itsĀ  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.

Privacy Settings
We use cookies to enhance your experience while using our website. If you are using our Services via a browser you can restrict, block or remove cookies through your web browser settings. We also use content and scripts from third parties that may use tracking technologies. You can selectively provide your consent below to allow such third party embeds. For complete information about the cookies we use, data we collect and how we process them, please check our Privacy Policy
Youtube
Consent to display content from Youtube
Vimeo
Consent to display content from Vimeo
Google Maps
Consent to display content from Google
Spotify
Consent to display content from Spotify
Sound Cloud
Consent to display content from Sound
 
Print Friendly, PDF & Email

DISCLAIMER

  • JK Capital Management Limited maintains this web site as a service to its customers. By using this web site, you agree to the following terms of use, which JK Capital Management Limited may unilaterally change at any time.
  • JK Capital Management Limited is authorized and regulated by the Hong Kong Securities and Futures Commission (“SFC”). However, the funds described in this web site are not authorized by the SFC and therefore are not available to the public in Hong Kong.
  • The information on this web site has not been reviewed by the SFC or any regulatory authority in Hong Kong. By law, the web site you are about to access is strictly restricted in Hong Kong to “professional investors”. Only “professional investors” are eligible to access the information herein. As defined in the Securities and Futures Ordinance (Cap 571, Laws of Hong Kong) and its subsidiary legislation, which may change from time to time, “professional investors” include the following:
    • Exchange companies and other automated trading facilities;
    • Licensed financial intermediaries, their wholly owned subsidiaries and holding companies;
    • Licensed banks, their wholly owned subsidiaries and holding companies;
    • Licensed insurers;
    • Authorised retail funds;
    • Hong Kong mandatory provident fund schemes or a trustee or an investment manager of any such scheme;
    • Any government of central banking authority;
    • An individual with a portfolio of investments valued at a minimum of HK$8m;
    • An investment holding company wholly owned by an individual referred to in preceding category
    • A trust corporation with total assets of at least HK$40m; and
    • A corporation or partnership having a portfolio valued at least HK$8m or total assets of at least HK$40m.
  • Information in the web site neither constitute an offer or public offering to anyone, nor a solicitation by anyone, to subscribe for shares of any funds. Nothing in the web site should be construed as advice and is therefore not a recommendation to buy, sell or hold shares, fund units or any other investment securities.
  • All copyright, patent, intellectual and other property rights in the information contained herein is owned by JK Capital Management Limited. No rights of any kind are licensed or assigned or shall otherwise be passed to persons accessing such information.
  • This web site contains links to other web sites. JK Capital Management Limited is not responsible for the availability of these outside resources or the accuracy of their contents. JK Capital Management Limited neither endorses, nor is it responsible for any of the contents, advertising products or other materials that may appear on those web sites.
  • Investment involves risk. Historical results do not necessarily indicate future performance.