October 2023
THE CIO’S PERSPECTIVE
The biggest events of the month are undoubtedly the spike in US Treasury rates, the surge in oil price and the rise of the US dollar. This created mayhem on equity markets around the globe, including in Asia. However, it is worth noting that the surge in the dollar index did not necessarily result in a weakening of all Asian currencies: The RMB CFETS index that compares the value of the Chinese currency to a basket of 13 other currencies gained 1.7% while the RMB/USD exchange rate remained almost unchanged at a time when all other Asian currencies weakened against the dollar.
The reason why the Chinese currency was particularly resilient is the combined result of market intervention by PBoC, the Chinese central bank that seems to have intervened to prevent its currency from depreciating below the 7.3:1 exchange rate to the dollar. It is also the consequence of macro data finally turning positive for China after six months of degradation.
We wrote last month that early indicators were pointing towards a recovery of the Chinese economy. We are glad to report that the most recent set of data points has indeed confirmed that trend. The relatively positive stance we took a month ago and that was at that time a contrarian view since comments made by journalists were all about doom and gloom has now become mainstream.
We reported last month the decision made at the end of August by the Central government to cancel home purchase restrictions, a move that was endorsed in September by several large cities. It appears that the impact so far remains muted, especially for new home sales in Tier 2 and Tier 3 cities. However, transactions in Tier 1 cities have somewhat picked up. We believe it will take a few months, if not a few years to restore confidence among Chinese home buyers and see a meaningful pickup in real estate activity.
While the Chinese economy improved in September, the Indian economy deteriorated. Macro numbers are now indicating that India is slowing down, albeit remaining in an expansion mode. The enthusiasm expressed by the community of investors about India started tapering in September. A recent diplomatic altercation between India and Canada that quickly turned into a nasty dispute also reminded observers that India was not the ally western countries were hoping to have in their quest for an alliance capable to stand up to China. In other words, the China-India pendulum that had swung to the extreme in favour of India over the past months has started moving back towards China.
Digging into the numbers, the official manufacturing PMI of China rose to 52.0 in September, up from 49.7 in August. Production PMI accelerated from 51.9 to 52.7, and the new orders PMI rose from 50.2 to 50.5. The Chinese rebound is largely driven by domestic demand: exports are still contracting on a YoY basis, admittedly at a slower pace than they did over the past months. The new export orders PMI remained in contraction mode but improved from 46.7 in August to 47.8 in September.
A similar trend of exports rebound can be observed in Taiwan and Korea, their largest export market for semiconductors being China. Korea’s exports of chips improved from -20.6% YoY in August to –13.6% YoY in September. The production of semiconductors in Korea rose by 13.4% MoM in August on a seasonally adjusted basis compared to a -2.5% contraction the previous month. In Taiwan, the new export orders PMI that is largely driven by semiconductors also rebounded strongly, from 40.4 in August to 46.0 in September.
In India, macro numbers have been trending down. The manufacturing PMI dropped from 58.6 in August to 57.5 in September (Bloomberg estimate was 58.0), exports are down 17% YoY and new orders PMI dropped from 63.2 to 60.9. Private consumption growth remains anaemic at +2.5% YoY, GDP growth being largely driven by infrastructure investments and to some extent by corporate investments. Headline inflation remains elevated at 6.8% in August, still well above the 4% to 6% target range set by the central bank. It is now the market consensus that interest rates will not be cut this year, contrary to what had been hoped earlier. Indian inflation numbers are also expected to be negatively impacted by the recent surge in oil price as India imports 80% of its oil needs, half of it coming from Russia. The impact of oil price on Indian inflation is all the more significant that the price offered by Moscow for crude oil is rumoured to be only 7 to 10% below international market price, a much lower discount than the 30% that had been negotiated by the Modi government after the implementation of the western embargo against Russia. Foreign investors pulled out of India USD1.8bn in September after having been net investors to the tone of USD1.5bn in August, USD5.7bn in July and USD5.7bn in June 2023.
WORDS FROM THE MANAGER
Source : Bloomberg, JKC – October 2023
September disappointed investors again with both Chinese and Asian indices going down for a second consecutive month. Market is not convinced about the early signs of a Chinese economic recovery (as discussed above) and takes a negative stance towards the ‘higher-for-longer’ interest rate environment that prevails in the US.
In the Chinese market, other than energy, financials, utilities, and healthcare, which rebounded from recent lows, all other sectors lost ground due to macro concerns, including consumer discretionary, information technology and real estate. Elsewhere in Asia, the Philippines and India did well, ending the month in green territory. Thailand was the worst performer, going down 9.5%, followed by South Korea (-5.2%).
Year-to-date, the Thai market suffered THB150bn ($4bn) of net outflows due to weak exports, a slow rebound in tourism due to the absence of mainland Chinese tourists, and political uncertainties on top of a weak currency. In Q4, the economy might enjoy a visible recovery as the new government’s stimulus packages take effect and as exports and tourism numbers may pick up. Overall, we remain optimistic about the growth outlook for Southeast Asia (ASEAN). Economists believe that ASEAN remains on track to become the world’s fourth largest economic block, just behind the US, China, and India. Same as India, it has a young population: about 60 percent of ASEAN’s total population is currently under the age of 35. Among ASEAN countries though, we need to make distinctions. Structurally we are most positive on Indonesia, which is the largest economy (GDP stands at $1.3 trillion) with the biggest population (275m), the largest land area (1.9m sq. km), a high household savings rate (43% of GDP), a low household debt-to-GDP ratio (11%), a low government debt-to-GDP ratio (37%) and abundant resources. This explains why we have an overweight position in Indonesia and an underweight one in other ASEAN countries.
CHINA PORTFOLIO
La Francaise JKC China Equity saw its NAV per share drop by 4.3% in September when the MSCI China index dropped by 3.1%.
Year-to-date, the fund is down by 15.6% while the MSCI China index is down by 8.9%.
The cash position of the fund stood at 7.4% at the end of the month.
Yum China was the best performance attributor in September, going up by 5.8%. Resilience of Zhejiang Sanhua and Sany International also helped. On the flip side, Xinyi Glass, Li Ning and China Resources Beer declined more than the index, which hurt the performance. As for trades, we initiated Fuyao Glass, a leading global auto glass maker while we trimmed Xinyi Glass, and took some profit on Yum China.
ASIA PORTFOLIO
La Francaise JKC Asia Equity saw its NAV per share drop by 1.9% in September when the MSCI Asia ex-Japan dropped by 2.9%.
Year-to-date, the fund is down by 11.0% while the MSCI Asia ex. Japan index is down by 2.4%.
The cash position of the fund stood at 6.2 % at the end of the month.
GMM Pfaudler in India continued to shine, gaining 18% during the month and contributing the most to the performance. Voltronic and Yum China also performed well. At the other hand of our spectrum, Leeno Industrial, Li Ning and Nari declined, which hurt the relative performance. During the month, we added to Aavas Financier, and took some profit on Li Ning and GMM Pfaulder. We initiated JCXH Mining in China, a contract mining company while we added Samsung Electronics to close our underweight on Korea.
OUR ESG ENDEAVOURS THIS MONTH
On the ESG front, there has been some action in the US as the state of California which has traditionally been a pioneer of climate initiatives passed a law to require large companies to disclose their full value chain greenhouse gas emissions. Like the EU’s Corporate Sustainability Reporting Directive (CSRD), the new law applies to all publicly listed and to private companies with sales greater than USD1bn. We expect the new law to have an impact on many upstream suppliers based in Asia. The announcement comes as the SEC is struggling to finalize its own climate-related disclosure rules, with the biggest debate being whether to make the disclosure of Scope 3 emissions mandatory or not.
Across the Atlantic, EU lawmakers moved to ban generic and emissions-offsetting-based green product claims. Under the new agreement, the EU’s rules will be updated to ban generic environmental claims such as “environmentally friendly” or “climate neutral” unless proof of “recognised excellent environmental performance” is provided. Similarly, this is expected to drive environmental data reporting among suppliers based in Asia.
Closer to home, Indonesia kicked off its carbon market trading this month which was initially set for last year but delayed due to inflation concerns. The scheme is currently operating on a voluntary basis with the price of carbon initially set at 69,600 rupiah/ton ($4.50), a fraction of what the EU carbon market is trading at. Nonetheless, we believe it is a good start to decarbonize the archipelago’s economy, and more particularly its power generation sector.
Lastly in China, the China Security Regulation Commission (CSRC) rolled out several new measures to prevent major shareholders of listed companies that are trading below book value or not paying enough dividends (less than 30% payout) from selling shares. This is aimed at boosting investor confidence. This arguably radical measure had an immediate impact on the market as nearly 100 A-share companies saw their major shareholders withdraw their shareholding reduction plans.
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