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September 2020

Key takeaways:

After a spectacular run of US and Chinese equities from mid-March until the end of August, the ice finally cracked for US technology stocks in the early days of September, pulling down the rest of the world including markets we are exposed to. The US dollar reversed its slide, gold corrected, and Asian markets felt the brunt of the downside pressure. With the US elections coming up fast and more and more signs pointing towards possible chaos, we remain cautious with our portfolios as markets will probably be volatile in the coming weeks. Despite this recent correction, our medium-term view has not changed. We remain of the opinion that liquidity will keep on flowing courtesy of the Fed and the ECB, that fiscal stimulus around the world won’t stop anytime soon, that the dollar remains on a downward trajectory and that the most liquid emerging markets will keep on benefitting from such largesse.

Looking more specifically at China, numbers are looking good. The economy keeps on accelerating as indicated by the most recent PMIs, or Purchasing Managers Index which is the most reliable forward-looking macroeconomic indicator, one that is widely used around the world: The official manufacturing PMI of China edged up from 51.0 to 51.5, the strongest data point of the past 25 months, while the Caixin PMI that tracks down the private sector stabilized at 53.0, slightly down from the 53.1 level of August but still an impressive print. The official non-manufacturing PMI reached its highest level in eight years at 55.9 while the official composite PMI hit its highest level since March 2012 at 55.1.

To put it in simple terms, the Chinese economy is roaring. It is actually roaring to the point that we expect China to start tightening its monetary and fiscal policy. This has already started as the People’s Bank of China, the Central bank, and the CBIRC, the regulator of the financial sector, are already cracking down heavily on the property sector, forcing developers to deleverage their balance sheets by capping their debt-to-assets, debt-to-cash and debt-to-equity ratios while they took action against lenders by capping their exposure to the property sector to 30% of their book.

This is why we have sold our exposure to property developers over the past couple of months. It is also why we have reduced our exposure to the Chinese banking sector that is expected to do its national service at the request of the government by rolling over bad loans. The sector will mechanically see its profits being cut as a result of provisions going up. The high-yielding banks are most vulnerable as we anticipate many of them to cut their dividends at the end of the year.

Looking more closely at our portfolios, it is clear that there has been in September a rotation from high-flying technology and “new economy” stocks to “old economy” companies that one could describe as being “unsexy”. We have always owned a number of them, their common denominators being superb management, strong cash flows, hard assets, no debt and down-to-earth business models. They tend to drag behind when markets fly high but they also outperform significantly when there is a correction. This is exactly what happened in September, and it largely explains the outperformance of our funds over the month.

Looking at countries around the region, it is Thailand that is giving us reasons to be concerned as the political situation is getting worrying. So far demonstrations asking for a return of democracy and, most importantly, a reform of the monarchy have been peaceful. We would not bet that this will remain as such for long as we cannot foresee a scenario where the military junta accepts to give up power and reform the constitution to satisfy protesters. We have sold in September our last investment in Thailand as any bloody crackdown would undoubtedly have a negative impact on local financial markets and on the Thai baht.


The fund did well in September outperforming the index by 0.8%. Top attribution contributors were Xinyi Glass (+16.3%), Li Ning (+9.8%) and SITC International (+5.1%), in that order. Our relative performance would have been 1% higher if not for a sudden 5% surge in Alibaba’s ADR traded in New York that represents 20% of the index and that shot up on the last day of the month. This surge during New York trading hours created a technical discrepancy for all funds that use the Hong Kong time zone for valuation cut-off, such as ours. Other relative performance detractors were Hefei Meiya (-17.8%) and Inner Mongolia Yili (-8.2%).

During the month, we continued to add to Will Semiconductor and to China International Capital Corporation (CICC). We added back some Heifei Meiya on dips, and we exited Times China and China Jinmao as we turned bearish for the Chinese property sector. We also inaugurated C&S Paper.

C&S Paper is the fourth largest household paper maker in China. China’s household paper sales grew from RMB65bn in 2010 to RMB125bn in 2018 with a CAGR of 8%. As at the end of 2018, China was the largest consumer of household paper products in the world, with a global share of 31%. In 2018, domestic per capita household paper consumption was 5kg, well below that in Taiwan (10kg), Japan (15kg), Korea (20kg), and the US (22kg). The demand for high-end household paper has also grown, as sales of high-end tissue paper have risen from 20% of the market in 2013 to 26% in 2018. We believe C&S Paper is best positioned to benefit from the premiumisation trend of the Chinese consumer as the company actively leads in product upgrade compared to its peers. A strong management team and a motivated staff should continue to drive the outperformance of the company compared to its peers over the next three years.

On the news front, during the month the China Securities Regulatory Commission (the “CSRC”) officially notified CICC that its A Share Offering application had been approved. Meanwhile, the CSRC, together with other Chinese regulators, announced the long-awaited approved amendments to existing rules for Qualified Foreign Institutional Investors (QFII) and RMB Qualified Foreign Institutional Investors (RQFII) to further liberalise the schemes by relaxing qualification requirements, simplifying the application process, expanding the investment scope and facilitating investments and operations for QFIIs and RQFIIs. It is a significant landmark for the securities industry and for leading players such as CICC. 


The fund did well in September outperforming the index by 0.4%. Top attribution contributors were Xinyi Glass (+16.3%), SITC International (+5.1%), and Li Ning (+9.8%), in that order. Bank BTPN Syariah, Hefei Meiya and a surge in Alibaba during US market hours on the last day of the month had a negative impact on the relative performance.

During the month, we continued to add to CICC while we initiated Will Semiconductor for our Asian funds, which we had already added to our China strategy and commented in our August reporting. We added to our existing exposure to Heifei Meiya, Koh Young and AIA on dips and we exited China Merchant Bank, Aces Hardware in Indonesia, Muangthai Capital in Thailand and China Jinmao as our convictions are no longer high.

On the news front, Reliance Industries Limited (RIL) continued to generate headlines by announcing a slew of deals with different investors for its Reliance Retail Ventures Limited (RRVL) akin to what we witnessed for its telecom arm Reliance Jio over the past few months: Silver Lake will invest USD1bn in RRVL for a 1.75% equity stake, KKR will invest USD745mn for a 1.28% equity stake and General Atlantic will invest USD500mn for a 0.84% equity stake. Reliance Retail operates India’s largest, fastest growing and most profitable retail format serving close to 640 million customers across its 12,000 stores nationwide.

The information and material provided herein do not in any case represent advice, offer, sollicitation or recommendation to invest in specific investments. 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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