March 2025
THE CIO’S PERSPECTIVE
For the first time in at least five years, a feel-good sentiment has emerged in China that triggered a powerful market rally. This wave of optimism could easily be spotted in Chinese social media. Its origin was the unannounced launch of DeepSeek, the Chinese AI company that developed a Large Language Model at a fraction of the costs incurred by its American peers. The nationalistic pride triggered by DeepSeek comes from the fact that the company behind DeepSeek was totally unknown, set up by an engineer, Liang Wenfeng, who did not graduate from a top university, and who succeeded in his endeavours by using standard low-performance Graphic Processing Units that are typically used for gaming computers. By doing so, the company behind DeepSeek circumvented the restrictions imposed by the U.S. administration that prevent Chinese companies from buying advanced chips designed by Nvidia. It is a prowess of ingenuity that turned Mr. Liang into an instant hero, who singlehandedly manage to restore the confidence in the future that the Chinese public had largely lost over the past five years.
The impact on the Chinese tech sector was further nurtured by the extraordinary meeting Chinese president Xi convened with the CEOs of the leading technology companies of China, sitting across the founders of BYD and Huawei, and ending up with a handshake with Jack Ma, the founder of Alibaba who had been purged by Chinese authorities in 2020. The message could not be clearer: After years of crackdown, the private sector that revolves around advanced technology has returned at the top of the agenda of a leadership that relies on these CEOs to boost the country’s economy. Even though it was more anecdotal, public sentiment was further boosted by the extraordinary performance of humanoid robots manufactured by Unitree during the Chinese New Year gala on CCTV, the most widely watched television show on earth.
This positive sentiment did not go unnoticed overseas. It translated into a surge in the stock price of many Chinese tech companies, some of them like Alibaba that had been out of favour for years. The Science and Technology Innovation Board index that tracks down the tech sector among A shares gained 11.9%, while the Hang Seng index of Hong Kong gained 13.4% and the China Enterprise Index gained 14%. Tencent gained 19.3% while Alibaba gained a whopping 44.4% in February as these two companies also released their own Large Language Models in February. They now compete head-on with DeepSeek. The average daily volumes traded on the Hong Kong stock exchange doubled from USD18bn in January to USD37bn in February.
This strong performance of the Hong Kong and China markets in February did not have any follower in Asia as all other markets were either flat or down during the month. A special mention of India that is seeing its small and mid-cap companies going through a correction. Since it reached its peak in September 2024, the Nifty Midcap 100 index lost 21% and 10.8% in February while the main Nifty index that consists of large caps was more resilient, loosing “only” 15% since its September peak and 5.9% in February.
This correction is the consequence of expensive valuations combined with a slowdown of the Indian economy. Last summer, analysts were forecasting a 7.0% GDP growth for the current fiscal year. This forecast has since been adjusted down to 6.3%. The budget that was announced early this month was a further disappointment: Capital spending by the government is expected to grow by 10% only in the next fiscal year compared with an average annual growth of 30% between fiscal years 2020 and 2024. The barometer of infrastructure construction, Larsen & Toubro has lost 20% since its latest peak reached in December.
With a new governor at the helm, the Reserve Bank of India cut its policy rates for the first time since May 2020, by 25bps, taking the repo rate to 6.25%. This move weakened the rupee which lost 1% in February and hit an all-time low of 87.5 to the USD. Institutional investors have clearly been selling Indian equities to buy Chinese equities in February.
A country we used to like a lot and that has gone on the wrong track is Indonesia. Sadly, the last year of the Jokowi administration and the first year of the Prabowo administration have brought back nepotism, cronyism and very likely more corruption. The latest sign of this degradation was the setting up of a new sovereign fund – Daya Anagata Nusantara (Danantara in short) which by the end of March will manage all State-Owned Enterprises of Indonesia, many of them being listed (banks, telecom etc). It will be headed by the former head of Prabowo’s presidential campaign team. A law was passed in February to set up this new sovereign fund. Amazingly it removed the fund from the scrutiny of government auditors and of anti-corruption bodies. It also immunises its managers from any legal responsibility in case of losses. The main Jakarta Composite index of Indonesia lost 11.8% in February while the rupiah lost 1.8% in February and ended the month at its all-time low.
WORDS FROM THE MANAGER
Monthly Performance
Equity markets are very difficult to navigate at present. This ever-changing geopolitical environment we are all facing is a catalyst for market volatility. The unpredictable tariff policy of the Trump administration makes it challenging to assess what the impact of these tariffs will be on our portfolio companies as products coming from Asia take circumvoluted routes before reaching American shores. Would a Korean memory chip sold to Apple and exported to China or India for final assembly into an iPhone before shipment to the United States be subject to US tariffs against Korean exports or to US tariffs against Chinese or Indian exports, or both? This example is not a random one as Korea and India are among the countries of Asia that stand to suffer the most from the “reciprocal” tariffs that the Trump administration is working on. Surprisingly, China should not suffer too much from the Trump proposed “reciprocal” tariffs as they stand now as China does not have large import duties on imports from the U.S.
Looking closely at statistics, the impact of 20% additional duties on Chinese exports to the U.S. will be limited: The average export ratio of Chinese listed companies is 15% to 30% depending on the industry they operate in, and exports to the U.S. are now down to 20% of all exports from China on average. U.S. import tariffs would therefore impact not more than 3% to 6% of the total manufacturing activity of China, which we reckon is very manageable. The inflationary impact on American consumers will likely be far greater.
On the high-tech front, we are following closely the reaction of the four U.S. hyperscalers that are at the forefront of Artificial Intelligence to the arrival of DeepSeek. It was thought initially that the boards of directors of Meta (Facebook), Google, Amazon and Microsoft would be enticed to cut their capex budgets for this year as it is now proven by DeepSeek that AI can be developed at a fraction of the development costs they have incurred so far, especially through the construction of massive data centres. That would have been a strong negative for chip makers TSMC, SK Hynix and their respective ecosystems.
Now that the dust has started to settle, it appears that the four above-named hyperscalers all decided to stick to their capex budgets for this year, namely USD320bn in total, compared to a total of USD230bn in 2024. This should bode well for the entire microprocessor supply chain, despite the drop in the stock prices of companies in the entire sector towards the end of February when Nvidia gave forecasts for this year that were slightly below analysts’ expectations. Our funds are exposed to the AI theme through investments in China, Taiwan and Korea.
In February we started building small positions in the Chinese humanoid robotic space for the reason that the sector has officially become a government priority, and as 2025 is the year when this humanoid robot concept is set to turn into reality. There is a lot to read in the fact that Unitree robots were put on stage during the Chinese New Year gala, a 4 to 5-hour show that is widely perceived as being a government mouthpiece channel.
We further cut our exposure to India as we foresee more volatility in the coming weeks, especially if the China rally sustains. We also sold our last position in Indonesia for reasons highlighted above.
CHINA PORTFOLIO
La Francaise JKC China Equity saw its NAV per share gain 8.3% in February when the MSCI China index rose by 11.5%.
The cash position of the fund stood at 6.9% at the end of the month.
As mentioned above, we added some exposure to the humanoid robotic sector by bringing back to the portfolio Sanhua and Tuopu, two auto suppliers that has started selling critical robotic components to Tesla, a company with large ambitions in that space. We also added Megmeet and Meitu, the former being a power electronic component designer and the latter being an AI-based app designer focusing on photo and video editing. For risk management purposes, we trimmed some exposure to companies that performed well over the past months and had become too large in our portfolios, namely Xiaomi, CATL, Trip.com, Meituan. We also added Hong Kong Exchanges and Clearing, the operator of the Hong Kong stock exchange that stand to be a direct beneficiary of the belated rebound of the Hong Kong stock market and a strong pipeline of IPOs. We exited during the month dairy producer Inner Mongolia Yili and laser-motion control systems manufacturer Shanghai Bochu as both companies no longer fit into our high conviction list.
Our best performers this month were Alibaba (+44.7%), BYD (+36.4%), Xiaomi (+35.6%) and Tencent (+19.5%) while our worst performers were Trip.com (-20.2%), Hexing Electrical (-15.4%), Suzhou TFC Optical (-12.7%) and Transsion (-8.2%).
ASIA PORTFOLIO
La Francaise JKC Asia Equity saw its NAV per share drop by 0.4% in February when the MSCI Asia ex-Japan index rose by 1.0%.
The cash position of the fund stood at 6.3% at the end of the month.
In February, we raised further our exposure to China while we kept on reducing our exposure to India as the pendulum of investment flows between the two countries turned on its head over the past two months. We also exited our two positions in Indonesia.
Our best performance was in China and Hong Kong with our exposures to these two markets gaining 12.2% and 7.5% respectively. At the other end of the spectrum, our Indian and Taiwanese exposure performed the worse, down 10.4% and 7.5% respectively.
At a securities level, the best performers over the month were all Chinese: Alibaba was up 44.7%, Xiaomi up 35.6%, Tencent up 19.5%, BYD up 12.8% and China Resources Land up 10.6%. The worst performers were BLS International in India, down 23.1%, Hyundai Electric in Korea, down 20.2%, Trip.com in China down 20.2%, Tata Consulting Services in India, down 16.2% and Voltronic in Taiwan, down 14.2%.
OUR ESG ENDEAVOURS THIS MONTH
In February, China’s Ministry of Ecology and Environment (MEE) implemented a significant expansion of its national carbon credit market, which previously only covered the power sector. The new initiative integrates the cement, aluminum, and steel sectors, which collectively account for over 20% of the country’s total industrial emissions. This move marks a crucial step towards reducing China’s industrial carbon footprint and aligns with the nation’s broader goals for achieving carbon neutrality.
Meanwhile, the European Union (EU) has announced plans to streamline its sustainability reporting requirements as part of its new Competitiveness Roadmap. This initiative aims to simplify the bureaucratic burden on businesses by consolidating existing frameworks. Specifically, the EU plans to remove 80% of companies from the scope of its Corporate Sustainability Reporting Directive (CSRD) and limit the sustainability information that large companies and banks can request from smaller companies. Additionally, the proposals include major simplifications and scope reductions for other key sustainability regulations, such as the Corporate Sustainability Due Diligence Directive (CSDDD), the Taxonomy Regulation, and the Carbon Border Adjustment Mechanism (CBAM).
Across the Atlantic, California’s new law requiring most large U.S. companies (with revenues greater than $1 billion) to disclose their value chain emissions and report on climate risks and strategies has survived a significant legal challenge brought by the U.S. Chamber of Commerce. A federal judge rejected claims that the new regulations violated the constitution and extraterritoriality rules. This ruling is highly significant, especially in the context of the Trump administration’s efforts to dismantle all ESG initiatives across the country, as it underscores the importance of state-level climate action and corporate accountability.
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