December 2024
THE CIO’S PERSPECTIVE
The election of Donald Trump alongside the clean sweep the Republican party achieved by winning control of both the House of Representatives and the Senate sent shivers around the world as his agenda of tariffing all imports has the potential of cutting the GDP growth of its trading partners quite dramatically. The most extreme opinion we read came from UBS which forecasts that a 60% tariff rate imposed indiscriminately on all imports from China alongside a 10% tariff rate imposed on imports from the rest of the world would cut China’s GDP growth by as much as 2.5% and global GDP growth by 1% the year after these tariffs are enacted.
We doubt these extreme measures will ever be enacted. We view these threats as negotiation tactics for the new US administration to obtain concessions from the rest of the world in the form of job creation in the US through the setting up of factories on US soil, including Chinese factories. This was hinted at by the newly appointed Treasury Secretary Scott Bessent who said in a recent interview that tariffs would be implemented “gradually” and that the eye-popping 60% rate applied to imports from China was a “maximalist negotiation position”. We take the view that this aggressive businesslike approach to laying out a new framework for international trade will be more palpable to the Chinese administration than dealing with the Biden administration. The latter’s priority was first and foremost to prevent China from getting access to any kind of advanced technology that could, one day, give global military supremacy to China whereas the former’s approach is more business driven, focusing on economic growth in the United States.
In other words, we see the Trump administration being much more interested in seeing jobs created in the United States by Chinese companies than suppressing China’s access to artificial intelligence. Chinese businessmen are pragmatic people who can easily be convinced to open factories on US soil if it makes financial sense, especially if products exported to the US and coming out from newly built factories in Mexico get taxed at 25%, as it was announced recently. As contrarian as it may sound, we see Trump’s election as a better outcome for China than what a Kamala Harris win would have been.
Markets don’t see it that way however as they seem to focus essentially on the headlines, while sell-side analysts keep on writing about the impact these 60% import tariffs on goods from China would have on Chinese exporters and on the Chinese economy. We take the view this scenario will never happen, if only because the inflationary impact of high tariffs on US consumers would be very significant, possibly enticing the Fed to do a U-turn and enter into a new monetary tightening phase that would push up the US dollar even higher, impacting negatively US exports.
Instead, we are more likely to see rather sooner than later companies like BYD produce electric cars or CATL manufacture EV batteries in the United States, and their respective supply chains moving in the same direction, even if production costs are much higher than they are in China. One of our portfolio companies, the Chinese company Fuyao Glass did just that as early as 2015 when it set up a factory in Ohio, and it turned out to be a big success, even if the early years were impacted by a difficult relationship with the American trade unions. Fuyao Glass America became a key supplier of locally made windscreens to the US car industry.
Back to the domestic affairs of China, the meeting of the Standing Committee of the Politburo at the start of the month was another disappointment for financial markets. No stimulus of the economy was announced. The main outcome was to allow local governments to issue RMB10 trillion of “special bonds” over five years to refinance off-balance sheet municipal debt (the so-called Local Government Financial Vehicles debt, or LGFV). This number compares with a total outstanding debt of LGFVs estimated by the International Monetary Fund at RMB60 trillion at the end of 2023. It will allow municipalities to settle their overdue liabilities and save RMB600 billions of interest expenses over the next five years.
This is a technical move that will have no impact on the economy, save for those civil servants and suppliers who will finally receive the money they were owed for months.
As long as we do not see any real stimulus of the economy that translate into cash in the pocket of the public, we will remain bearish as to the likelihood of a quick economic rebound. The next scheduled meeting during which additional policy directions may, or may not, be announced will be the annual National People’s Congress, to be held in March 2025.
One important piece of news that caught our attention and that the press seems to have missed comes from the European Parliament, and more specifically from Mr. Bernd Lange, the chairman of the European Parliament’s International Trade Committee who recently disclosed that the European Union and China were about to reach an agreement to cancel the tariffs that were just put in place on the imports of Chinese electric vehicles into the Union in return for Chinese manufacturers not selling any electric car below a certain minimum price, such minimum price being the crux of the ongoing negotiation. In practice, that would leave European car makers some breathing space for selling low-end cars, while allowing Chinese car makers to sell mid-range and luxury cars within the European Union without any tariff. That would be very good news for Li Auto, BYD, Geely and SAIC (the owner of MG), and bad news for Tesla, BMW and Mercedes Benz.
WORDS FROM THE MANAGER
Monthly Performance
The election of Donald Trump triggered a powerful rally in the US dollar that was not welcome in Asia. The perspective of a fast-expanding fiscal deficit in the United States that will finance tax cuts is inflationary in nature. Interest rate in the US may no longer be cut as aggressively as initially thought, and that pushed the dollar higher in November. The dollar index gained at some point 3.4% before correcting a bit, ending the month up by 1.7%. Since the end of September, the dollar index gained 5.3%, a very large move by any standard.
The likelihood of inflation picking up in the US was reinforced by the aggressive – and unrealistic- tariff agenda of Donald Trump. The impact across Asian markets was mixed: Not surprisingly, Indonesia suffered the most as its main Jakarta Composite index dropped by 6.1% because of the high exposure of its economy to US dollar denominated debt. Chinese equities listed offshore also suffered, the MSCI China index having dropped by 4.4%. This was also due to the absence of any stimulus coming from the Standing Committee of the Politburo meeting. After gaining 25% in nine days after the Chinese government promised on 24th September some economic stimulation measures that never came, the MSCI China index retraced by almost 18%.
Korea also had a difficult month of November. The main Kospi index lost 3.9% while the tech-centred Kosdaq index lost 8.7%. This was largely due to the retracement we saw for AI-related stocks globally after Nvidia announced its Q3 numbers during which it provided some conservative guidance for the coming quarters. SK Hynix, the main supplier of High Bandwidth Memory chips that pair with the “Hopper” Graphic Processing Units of Nvidia, lost 14% in November while Samsung Electronics lost 8.5%.
At the other end of the spectrum, we saw India rebounding after the 11% correction recorded by the main Nifty index between the end of September and mid-November. Despite some disappointing macro numbers over the past couple of months, we remain bullish on India. The Nifty index ended the month down 0.3%. Despite the recent market correction, net inflows in equity mutual funds reached an all-time high of INR498bn (USD5.9bn) in October, an increase of 37% over September. Over the first ten months of the year, mutual funds inflows have increased by 75%.
CHINA PORTFOLIO
La Francaise JKC China Equity saw its NAV per share drop by 6.1% in November when the MSCI China index dropped by 4.4%.
The cash position of the fund stood at 10.4% at the end of the month.
The market disappointment related to the lack of forceful decisions by the Chinese leadership led to further correction in our e-commerce investments with Alibaba losing 11.6%, PDD losing 19.9% and JD.com losing 7.6%. The financial sector was also hit, with the state-owned property developer China Resources Land losing 11.1%, and the banking sector suffering losses: ICBC, Bank of China, China Construction Bank and China Merchant Bank all lost between 2% and 7% during the month. The only bright spot in our China portfolio was Netease, the gaming software company, which gained 9%. Given the prevailing negative sentiment toward Chinese equities, we decided to reduce the beta profile of the fund by cutting its exposure to higher beta stocks Shenzhou International, Xinyi Glass and China Resources Beer.
ASIA PORTFOLIO
La Francaise JKC Asia Equity saw its NAV per share drop by 5.5% in November when the MSCI Asia ex-Japan index dropped by 3.4%.
The cash position of the fund stood at 6.7 % at the end of the month.
There was a correction in Artificial Intelligence related companies within our portfolio with TSMC, SK Hynix, Samsung Electronics, Chroma, Voltronic, all located in Taiwan and South Korea, dropping between 2% and 15% in November. This was essentially due to the cautious outlook given to the market by Nvidia during its last group call with analysts. Chinese listed companies also had a difficult month as market participants expressed their disappointment after they had been promised by China’s leadership a forceful stimulation of the economy that never came. Within our portfolio, Southeast Asia fared better, especially our Singapore small cap name Sheng Siong that gained 4% in November and 10% since the end of September. We also benefitted from the rebound of Indian equities, with a special mention of shopping mall developer and operator Phoenix Mills that gained 8.3% and of IT consultant Infosys that gained 5.2%.
During the month we increased our exposure to India through the addition to the portfolio of Computer Age Management Services, the main share registrar for mutual funds, and Polycab, the largest cable and wires manufacturer of India that surfs on the infrastructure push of the Modi government. Still in India, we decided to exit Titan and PVR Inox following the release of worrisome quarterly results.
OUR ESG ENDEAVOURS THIS MONTH
Despite the uncertainty added to the ESG world by the US election results, particularly regarding climate change, this month’s COP29 event concluded bearing fruitful achievements. A breakthrough was the agreement to triple climate finance from developed countries to developing countries, aiming for $300 billion annually by 2035. This funding will support the transition to clean energy, adaptation to climate impacts, and addressing loss and damage from climate disasters. Progress was made on Article 6 of the Paris Agreement, finalizing the rules for carbon markets. This includes mechanisms for country-to-country trading and a centralized carbon market under the UN.
Earlier this month, EU lawmakers delayed the implementation of the EU Deforestation Regulation by one year. This regulation aims to ensure that products imported to or exported from EU markets do not contribute to global deforestation and forest degradation. The delay also introduced a “no risk” category for countries with negligible deforestation risk, subjecting them to less stringent requirements. Environmental groups are concerned these changes could weaken the regulation’s effectiveness.
Also in November, China introduced its first-ever Energy Law, to be effective by 1st January 2025. Aiming to enhance renewable energy development and optimize its energy structure, the legislation covers measures to control carbon emissions and promote green energy consumption through systems like green electricity certification. It outlines provisions for developing and utilising various renewable energy sources such as hydropower, wind, solar, biomass, geothermal, and hydrogen energy. Symbolically, it also legally binds the country to its goal of achieving carbon neutrality by 2060.
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