November 2024
THE CIO’S PERSPECTIVE
After the strong rally China had in September on the back of a series of meetings and announcements made with the objective of restoring confidence through economic stimulation, investors were eager to obtain the details in the early days of October. In a typical fashion that has become too familiar, no such details were provided during the month of October, and the market gave back some of the gains of September. It is now believed that concrete measures may, or may not, be announced at the Standing Committee of the National People’s Congress, to be held between 4th and 8th November.
From the various announcements made in October by officials, we already know that the focus will be on fiscal measures to come to the rescue of municipal governments that are running out of cash to the point that they are late on the payment of the salaries of their civil servants and suppliers. Trillions of yuan’s worth of bonds (10 trillion according to Reuters, equivalent to 8% of GDP) will be issued by local governments, and subscribed by state-owned banks, insurance companies and government-controlled asset managers. Hence the planned recapitalisation by the Central government of the six largest banks to help them participate without hitting their capital adequacy ratios.
The purpose of the exercise is to give local municipalities the cash not only to pay their debt, but also to set a floor on their respective property markets through asset purchases and conversion into social housing. The goal is to restore confidence among the general public, such confidence being very low at present. If everything goes according to plan, it will kick start a rebound in consumption patterns, in the real estate market and in the stock market.
What was made abundantly clear is that there will not be any monetary stimulus in the form of direct subsidies, “cheques in the mail” and other forms of “helicopter money”. It means in essence that whatever confidence in the system could be restored in the future, it will take time, possibly several quarters, before the impact of technocratic fiscal stimulation filters into the economy and ends up making a difference to people in the street. On that front, one key indicator that we follow closely because it impacts so many people is the youth unemployment rate that covers the 16-24 years old who are not at school or university. This statistic that is published every month reached 17.6% in September, its second highest reading after 18.8% in August. It was 14.9% at the end of last year.
Another indicator we follow closely are property sales on the primary market which saw a recent pick-up: In October, the sales of the top 100 real estate companies increased by 10.5% year-on-year and 67.4% month-on-month. Of course, it will take more than a single data point to convince us that the worst has passed. For the first 10 months, the decline in sales of these promoters is -34.7%.
As we expected, the rally we saw in Chinese equities triggered institutional rotation out of India, which was the worst performing market in October. The Sensex index was down 5.4%, and the Nifty 50 index down 5.8% over the month. The good news is that the USD12.6bn net selling by foreign institutional investors in September was met by USD12.1bn of net buying by domestic institutional investors who saw the rare occurrence of a market adjustment to add more exposure to the domestic market. The number of retail investors entering the Indian market through mutual funds is on a continuous upward trend, as can be seen through the Systematic Investment Plan (SIP) used in India by the general public. There were 98.7 million SIP accounts at the end of September, and 5 to 6 million new accounts being added every month.
On the geopolitical side, we cannot underestimate the importance of the agreement reached in October between India and China ahead of the BRICS summit hosted by Russia. The two countries finally ended their border dispute over Kashmir and Ladakh which had seen several instances of military confrontation in the Himalaya, many casualties, and a strong animosity develop between the two governments to the point that India refuses to issue tourist visas to anyone holding a China, Hongkong or Macau passport. Having buried the hatchet, one can easily imagine the consequences a renewed partnership between India and China could have for the two countries, and for the world.
As these lines are written all eyes are turned on the US presidential elections and on the consequences a Trump victory could have for the US dollar, for emerging currencies, for US inflation and USD rates, and for global trade knowing that Trump is ready to impose a blanket 60% tariff on all imports from China. It is possible that the announcements to be made after the NPC meeting in early November could be influenced by the outcome of the US elections.
WORDS FROM THE MANAGER
October was not a good month for Asia in general, the main culprit being the 3.6% rise of the dollar index as the possibility of a Trump victory became more likely. It would bring large corporate tax cuts, alongside systematic import tariffs that would be detrimental to Asian exports, let alone Chinese exports. Indian equities corrected by more than 5%, Chinese A shares by 3.2%, Korean equities dropped by 2%, Southeast Asian countries were mixed. The only strong performance was the 2.7% rise of the Taiwanese index.
The strong divergence between the Korean and Taiwanese indices is really the result of the opposite performance this year of TSMC and Samsung Electronics, the two largest chip makers in the world. In October TSMC gained 6.4% while Samsung Electronics lost 8.2%. Year-to-date, TSMC (32% of the MSCI Taiwan index) is up by 72% while Samsung Electronics (18% of the MSCI Korea index) is down by 26%. Such a divergence between the two behemoths is unprecedented. It is directly related to the impact Artificial Intelligence has made on the two companies. Technology analysts estimate that TSMC now has 20% of its business producing AI logic chips (Graphics Processing Units, or GPU) for Nvidia and smaller rival AMD, and holds a monopoly. It was also reported this month that its brand-new Arizona factory achieved a production yield for high performance chips higher than where it stands in its Hsinchu base of Taiwan.
By contrast, Samsung Electronics has no exposure to AI logic chips. It is also facing development issues and production delays with its AI memory chips (so called High Bandwidth Memory, or HBM) that bundles with the GPUs to the point that arch-rival SK Hynix managed to take the technology lead and grab the bulk of the market.
Another highlight of the month is the pushback seen by Asian companies exposed to the EV battery sector and to the painful EV transition of western automakers. The difficulties encountered by the Chinese joint venture partners of European and American carmakers have come out. SAIC, the Chinese partner of Volkswagen and General Motors announced quarterly profits down by 93% YoY. GM sales in China in the third quarter are down 21% YoY. Volkswagen sales are down 12%.
KPIT, a leading company from India specialised in designing software for EVs, disclosed during its latest quarterly call that its European clients were delaying many transition projects. Korean battery suppliers of western EV car makers are also having a tough time. Samsung SDI’s share price lost 30% this year. Ecopro BM that is a leading upstream producer of cathodes lost 40%. LG Energy Solution’s share price is the only Korean name that managed to remain flat year-to-date. On the other hand, Chinese battery suppliers are doing well. CATL’s share price is up by 53%. On the OEM side, BYD is up 30%. Late comer Seres which only has three models of EV cars for sale is up 50% and has a market capitalisation equivalent to half of General Motors and Volkswagen. Despite all the pushbacks seen in Europe and in the United States against Chinese electric cars, BYD is now the largest EV car maker in the world. Its sales of USD28.2bn in the third quarter, up 24% YoY, outgrew Tesla’s sales.
CHINA PORTFOLIO
La Francaise JKC China Equity saw its NAV per share drop by 5.6% in October when the MSCI China index dropped by 5.9%.
The cash position of the fund stood at 3.2% at the end of the month.
As the China market gave away some of the strong gains it had in September, the large capitalisations with high beta that are widely owned by institutional investors suffered the most. In the e-commerce space, Alibaba dropped by 14.1%, Pinduoduo (PDD) by 10.6%, JD.com by 7%. In the technology and electronic gaming space, the correction was also significant, with Baidu down 15.6%, Netease down 17.8% and Tencent 9.1%. Among the large e-commerce names, one name stood out – the food delivery giant Meituan which gained 6%.
Among other names we own, we were positively surprised by Xiaomi, the smartphone manufacturer that recently branched out into electric cars and made quite an impact by selling more than 20,000 of its recent SU7 model in October. It also showcased its SU7 Ultra, the fastest 4-door car ever made with a top speed of 350km/h and the ability to reach 100km/h in less than 2 seconds. It is selling for only USD114,000, a bargain price for a super car with that kind of performances. Xiaomi’s share price gained 18.6% in October.
Another recent addition to our portfolio, TFC Optical Communication, gained 26.5% in October.
ASIA PORTFOLIO
La Francaise JKC Asia Equity saw its NAV per share drop by 4.4% in October when the MSCI Asia ex-Japan index dropped by 4.5%.
The cash position of the fund stood at 4.9% at the end of the month.
With the sole exception of Taiwan that saw TSMC gain 6.4% and drive local market indices up, all other markets across the region lost ground. The main reason was the strong surge of the US dollar against all regional currencies. The impact was particularly strong for the Malaysian ringgit which lost 5.8% against the dollar, and the Korean won that lost 4.5%. The Indian rupee was the most resilient, down only 0.3%, alongside the Taiwanese dollar, down 1.1%.
The rotation out of India and into China put some pressure on several of our Indian holdings. Bajaj Auto, Phoenix Mills, Titan, KPIT all dropped by more than 10% in October. We decided to dispose of our investment in KPIT after the technology company disclosed that the western auto manufacturing clients it provides services to had decided to delay the implementation of their EV transition. Fortunately, one of our core Indian holdings, Rainbow Children’s Medicare which runs the largest network of children’s hospitals in India published a stellar set of quarterly results and saw its share price gain 15% during the month.
In China we were surprised to see not only the banks we own but the entire banking sector perform well and gain in value in a down market. This is even more surprising to us that we see the banking sector as the one that will contribute the most to the stimulation of the economy as it will have to buy large quantities of new municipal bonds. The largest banks will need to go through equity capital fund raising that will impose some dilution on minority shareholders.
OUR ESG ENDEAVOURS THIS MONTH
In early October, the European Commission initiated infringement procedures against 17 EU member states for not fully transposing the new Corporate Sustainability Reporting Directive (CSRD) into their national laws. This directive, which will take effect in 2024 for large public companies, still requires action from these states to be fully implemented, according to the Commission. The states receiving the letters include Belgium, Czech Republic, Germany, Estonia, Greece, Spain, Cyprus, Latvia, Luxembourg, Malta, the Netherlands, Austria, Poland, Portugal, Romania, Slovenia and Finland.
This month, the Hong Kong Monetary Authority (HKMA) launched its Sustainable Finance Action Agenda, which includes several key directives for banks. These directives aim for banks to reach net zero emissions from their financed activities by 2050 and to enhance transparency on climate-related risks and opportunities. The agenda also focuses on supporting green and sustainable financing, promoting innovation in sustainable finance, and providing training programs for finance professionals.
As part of the China’s stimulus package to revitalize the weakening economy, the 300 billion yuan stock repurchase loan facility scheme has been gaining momentum this month. Under this scheme, listed companies and their controlling shareholders can borrow from banks at a preferential rate of 2.25% (vs a 1-year Loan Prime Rate currently at 3.1%) for stock buybacks or to increase their shareholding. Over 40 A-share listed companies have announced plans to use funds from the scheme for share buybacks. It is then for the management of these companies to decide to either cancel the shares and immediately improve shareholders returns or to keep them as treasury shares for future re-sale to the market or to their employees through an Employee Stock Ownership Plan.
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.