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May 2024

THE CIO’S PERSPECTIVE

April was a very good month for Chinese equities as they staged an impressive rebound, outperforming all major markets around the world by a wide margin. The MSCI China index gained 6.4% when the MSCI World index lost 3.9%. In the United States, the S&P500 index lost 4.2%.

Reasons for this strong performance are manyfold. The first one is the continuing impact of the government’s decision back in February to set a floor to the market when it ordered the “National Team” of state managed funds to actively intervene in the market. That triggered a first leg up, with the MSCI China gaining 8.5% in February, and more gains in March. The second leg in April of this powerful rally kickstarted with the publishing of the GDP growth rate of China for the first quarter that hit +5.3%, a strong beat compared to the Bloomberg consensus of economists that stood at +4.8%. Admittedly, the strong GDP growth was front-loaded as key macro numbers including retail sales and industrial production showed a downtrend in March compared to an uptrend in January and February. At the risk of repeating what we discussed last month, it is important to highlight once again the very strong exports of Chinese goods to other emerging markets, namely Africa, Latin America and Southeast Asia. For instance, Chinese exports to Southeast Asia doubled in the past seven years to reach approximately USD 45bn per month when exports to the United States are now back to where they were in 2017, at USD 40bn per month.

Then came the first quarter results of A share companies that, by and large, were good, including for the companies we own across our portfolios. Most importantly, the outlook for the rest of the year is positive as raw material prices have come down for many commodities, and as inventories of finished goods dwindled significantly.

Another catalyst for the good market performance was the detailed guidelines provided by the CSRC, the Chinese securities regulator, about its new delisting mechanism. This was a follow-up to the decision made by the new chairman of the CSRC to cut the number of IPOs in order to direct liquidity towards the secondary market, as we discussed last month. Companies that do not distribute more than 30% of their profits through dividends over a three-year period and a minimum of RMB50m will first be flagged by having their stock ticker showing a ST prefix (for “Special Treatment”). If the situation does not improve within two years, they will then be automatically delisted unless their research and development expenses accounted for more than 15% of their operating profit. It was probably not a coincidence to see many state-owned enterprises declare higher dividends payout when announcing in April their 2023 results, with some saying they will be paying interim dividends for the first time this year. The trend for regulators to emphasis good corporate governance started in Japan where it made a real impact. It was quickly followed by Korea, and now by China. The Hang Seng China Enterprise Index that has a large proportion of state-owned enterprises gained 8% in April.

Foreign funds have been net buyers of domestic Chinese stocks for three months in a row, according to Stock Connect statistics. This had not happened since March 2023. Uncertainties related to geopolitics seem to have taken a backseat for institutional investors, their dominating motivation for buying Chinese equities likely being the mismatch between an economy that is on the mend and very cheap valuations.

In April, the US Federal Reserve chairman delayed the planned cut in Fed fund rates as the US keeps recording an elevated level of inflation. It triggered a further rise of the dollar against other currencies, the dollar index appreciating by 1.9% in April. Normally this should have contributed to negative performances for Asian equities, but clearly it did not happen in China as the case for a rebound due to undervaluation proved to be overwhelming.

A year ago, geopolitical turmoil axed around China associated with the bad performance of Chinese equities over the past years pushed many asset managers into launching global Emerging Markets ex-China equity funds. In this regard, we came across interesting statistics published by UBS: Such new strategy only raised $14bn so far, with $0.8bn-$1bn of monthly inflows, when traditional global Emerging Markets equity funds that include China still manage $1.3 trillion of assets.

Moving away from China, the rise of the US dollar pushed the Central bank of Indonesia into hiking its benchmark rate by 25bps to 6.25%, its highest ever. This is in reaction to the Indonesian rupiah being on a depreciating path, and at a hair’s breadth of its lowest level ever that had been hit in the early days of the Covid pandemic. The exposure of Indonesia to US dollar denominated debt is the highest across Asia.

Finally, we saw good growth coming out of Korea, the GDP having expanded by 1.3% on a QoQ basis in the first quarter, more than double what economists were forecasting. Over the past 12 months, the Korean economy expanded by 3.4%, driven by strong exports that grew by 8.3% YoY, semiconductors taking the lead. First quarter results announced by memory giant SK Hynix were very strong, with a 144% YoY growth in revenues, while the management provided the market with an outlook for the coming quarters all the more promising. A similar positive outlook was given to the market by Taiwan’s semiconductor giant TSMC with a 16.5% YoY growth in revenues recorded in the first quarter and expectations of a 30% YoY growth for the second quarter. Same as last year, the TAIEX index of Taiwan is the best performing index of Asia, up 13.8% in the first four months of 2024. TSMC is up 33%.

WORDS FROM THE MANAGER

                                                                                                      Source : Bloomberg, JKC – May 2024

April was a good month in many respects. First quarter reports published by Chinese A shares, Taiwanese, Indonesian, Korean and Indian companies were largely good. Focusing more specifically on the Chinese A share market, we witnessed strong revenue and earnings growth across many sectors including materials, industrials, and capital goods. Investors who were so desperate about China that they cut their exposure in January must wish to hadn’t done so. The business sentiment on the ground was not as dire as some western media tended to depict it at the start of the year.

Other good news came from the Chinese government. There was a series of American visitors to China this month, starting with Secretary of the Treasury Janet Yellen (for the second time in ten months) who spent six days in Beijing, drinking beers and visiting the Forbidden City, followed by Secretary of State Antony Blinken who spent three days and found the time to buy a Chinese rock star album in a Beijing record store, quickly followed by Elon Musk who had just cancelled a trip to India where he was supposed to meet Mr. Modi and instead decided to fly to Beijing to meet Premier Li Qiang to get the auto-pilot features of his Tesla cars approved by Chinese regulators.

The other Chinese government’s move (or at least the market believes there is a move to come) is actions to be taken to tackle housing market inventories. For the past twelve months, the Chinese government has been criticized for not doing enough to mitigate the property sector drag on the economy by offering solutions to reduce the huge inventories accumulated across tier two and tier three cities. On the eve of the May 1st Labor Day holiday, the Politburo proposed to “do coordinated research on digestion of housing inventories”. It was the first time the Chinese government officially admitted there was a problem with unsold inventories of flats. We are looking forward to finding out what actions will be finally taken to bring the housing market supply and demand balance back on track. And one cannot emphasis enough the impact the housing market has on the economy at large. 

CHINA PORTFOLIO

La Francaise JKC China Equity saw its NAV per share rise by 6.1% in April when the MSCI China index rose by 6.4%.

The cash position of the fund stood at 4.6% at the end of the month.

Rianlon and Fuyao Glass were the biggest performance contributors going up 31% and 15% respectively. Shanghai Bochu also contributed, going up 17%. On the flip side, Nari went down 3.5%, Yum China went down 4.4% and Shenzhen Transsion went down 14%, hurting our relative performance. On trades, we took some profit on Zijin Mining and JCHX Mining. We added to Shenzhen Transsion and Jiangzhong Pharmaceutical.bo Tuopu and trimmed some Yum China as we anticipate a weak set of results.

ASIA PORTFOLIO

La Francaise JKC Asia Equity saw its NAV per share rise by 2.2% in April when the MSCI Asia ex-Japan index rose by 1.1%.

The cash position of the fund stood at 4.9% at the end of the month.

Zijin Mining that went up 11%, Fuyao going up 15%, and SITC International going up 23% were the biggest performance contributors. On the flip side, Park Systems, Yum China and Voltronic Power were the main detractors going down 13%, 4.5% and 7%, respectively. Regarding trades, we took some profit on Zijin Mining. We added to China Resources Beer, Xinyi Glass and to Shenzhou International.

OUR ESG ENDEAVOURS THIS MONTH

Following up on the ESG disclosure consultation paper which was released right before the Chinese New Year in February, the three stock exchanges of China published the finalized version of the regulation in April. Compared to the initial draft, the final version added some disclosure topics with local characteristics and enhanced clarity to offer better guidance to reporting entities. For instance, it further defines financial materiality as having a “significant impact on the company’s business model, business operations, development strategy, financial situation, operating status, cash flow, refinancing methods, and costs in the short, medium, and long term”. With an effective date set for May 2024, it is anticipated that major A-share companies will begin providing higher-quality ESG data from 2025 onwards.

In parallel, the Hong Kong Stock Exchange updated its climate-related disclosure rule based on feedback and results from a consultation paper released earlier. Notably, following the IFRS S2 standard, many climate-related data points have been ambitiously revised to “mandatory disclosure” instead of “comply or explain” as in the previous version. Scheduled to take effect in January 2025, the new regulation also includes implementation exemptions, such as proportional and phased measures, to address potential challenges faced by certain issuers regarding disclosure requirements.

Meanwhile, developments in the European Union (EU) present a different trajectory. Following a significant scaling back of the Corporate Sustainability Due Diligence Directive (CSDDD) which we discussed last month, the European Council announced in late April the approval of a directive delaying the adoption of standards for companies to provide sector-specific sustainability disclosures and for sustainability reporting from non-EU companies under the Corporate Sustainability Reporting Directive (CSRD). Under the newly adopted directive, the deadline for non-EU companies to adopt the regulation will be extended to the end of June 2026, while the deadline for sector-specific disclosure will also be postponed by two years.

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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