October 2024
THE CIO’S PERSPECTIVE
After two years of denial, the Chinese government finally woke up to the reality that its economy was in dire need of forceful actions to reverse a downward spiralling trend. It all started on 24th September with an unprecedented press conference called at short notice by the Governor of PBoC, the Central bank, just two days after a scheduled meeting left rates unchanged and markets once again disappointed. During the latest meeting, PBoC announced it was cutting rates across the board in a forceful way, including a 50bps cut of the Required Reserve Ratio, with promises of more cuts by the end of the year. Mortgage rates were also cut by 50bps.
According to Bloomberg, a potential fresh capital injection of RMB1 trillion into state-owned banks will be announced in the coming days to boost their Tier 1 capital ratios and help them become the financial conduit of fiscal stimulus without having to bear the consequences for their capital adequacy ratios. In addition, the government will provide 100% financing to banks at favourable terms each time they lend money to state-owned companies to buy unsold completed real estate inventory and turn it into social housing, within the framework of a RMB300 billion quota.
To boost the stock market, the above RMB300 billion quota will also be used by banks to lend to listed companies and to controlling shareholders willing to buy shares in their own company. Another RMB500 billion swap facility will be allocated to brokers to directly support the stock market, the government now accepting ETFs as collaterals.
Two days later, another critical meeting took place, this time of the Politburo of the CCP. The declared objective was to revive a moribund stock market and stimulate the economy, while setting a floor to property prices. One of the measures announced was to cut the minimum downpayment requirement for second-home purchases from 25% to 15% (same as for first-home purchases) across the country. For the first time ever, property owners will be allowed to renegotiate their mortgages with their banks and even change banks to obtain better conditions. An estimated RMB300 billions of savings will be generated every year for mortgage holders, according to Jefferies. Of course, banks will see their net interest margin cut as a result.
More measures are expected to be announced in the coming days, including the issue of RMB2 trillion of special bonds to boost consumption, according to Reuters. One of them is rumoured to be a RMB800 (USD114) allowance per month and per child to all families that have more than two children, the subsidy starting from the second child. The municipality of Shanghai has already announced that it will give away RMB500 million worth of consumption coupons to its residents.
These measures are critical since their scope is far broader than anything that had been announced so far. This sudden move was widely perceived by the market as a sign of desperation, if not panic, just three months before the end of the year as it has become clear that it was impossible for the Chinese economy to grow by “approximately 5%” as predicted at the start of the year. But most importantly it shows that the Chinese leadership has finally moved away from the state of denial it had been in since the post-Covid reopening of the economy at the end of 2022 and has started taking actions that were long overdue. Whether these measures will be enough to restore the general public’s confidence in the leadership remains to be seen.
Unsurprisingly, the market rebounded very strongly in the last days of September. It is now widely expected that additional fiscal measures to stimulate consumption will be announced shortly. If no such measures come out, the market euphoria of the past few days may well turn into another dead cat bounce.
Moving away from Mainland China, we saw significant outflows of foreign institutional money from Taiwan following more than two years of staggering performance for the Taiwan main TAIEX index, largely driven by TSMC and its exposure to AI. More than USD18bn of equity investments poured out of Taiwan in the third quarter, a 24-year record. Even though it is too early to tell, we also expect some rotation out of India and back into China if the China rally was to sustain.
A last word about the impact of US monetary policy and of the 50bps rate cut announced by the Fed in September which saw the dollar weaken further. The dollar index is now down 4.8% over the past three months, and this is good news for Asian markets as it brings stability to local currencies, allowing Central banks across the region to cut rates without running the risk of seeing their currencies depreciate.
WORDS FROM THE MANAGER
The sudden actions taken by the Chinese government at the end of September took the market by surprise, same as it did when it suddenly announced without warning the lifting of all Covid restrictions in November 2022. The MSCI China index gained 23.1% in September. Whether this is the bazooka the market had been waiting for remains to be seen. There is still a lot of doubt among portfolio managers who, like us, had been very prudent with their China exposure while the economy was increasingly running into difficulties and kept a high level of cash. Nevertheless, we decided to give China the benefit of the doubt and to raise our exposure to the country while increasing our exposure to the large benchmark names that are always the first ones to benefit.
While we raised our China exposure, we also cut our overweight exposure to Chinese banks as minority shareholders will end up bearing the consequences of seeing the banks recapitalized by the State for the first time since 1998, creating dilution for minority shareholders to help buffer a likely rise in non-performing loans due to the government largesse. It is also clear that the refinancing of mortgages will hit their margins.
As hinted in the previous section, we are particularly interested in finding out if the recent events in China will trigger a rotation out of India, a market that can be seen as overheated, and back into China, arguably the cheapest sizeable market in the world.
A two-week field trip across India in September, meeting two dozen companies in five cities left us with a very enthusiastic feeling. The infrastructure build-up is everywhere to be seen, with a special mention of underground subways, brand-new airports in Tier 1 cities, and even a state-of-the art proton cancer treatment hospital with its in-house cyclotron that we were certainly not expected to see in Hyderabad. Electric vehicles are making headways in city centres with a special mention of two brands, Tata Motors which is having a born-again transformation and MG, which in India is a joint venture between the local conglomerate JSW and SAIC from China. The two brands dominate the Indian EV space. And most surprising to us, signs of extreme poverty which were prevalent in large cities prior to Covid have now become relatively rare.
Indian companies are prime beneficiaries of the anti-China movement seen across the western world, and not only in the electronic manufacturing area. Within the pharmaceutical space for instance, we met large Contract Development and Manufacturing Organizations (CDMOs) that are directly benefiting from the actions taken by the US Congress against the largest Chinese CDMOs (e.g. Wuxi Apptec) as it seeks to ban them from working for the American big pharma.
Meeting companies in India brought us the “feel good” factor that we once had thirty years ago when visiting Chinese factories for the first time, and it makes us realise that there may be good reasons for the high valuation of the Indian equity market.
CHINA PORTFOLIO
La Francaise JKC China Equity saw its NAV per share rise by 20.1% in September when the MSCI China index increased by 23.1%.
The cash position of the fund stood at 4.2% at the end of the month.
We reduced the cash position of the fund from 9.7% at the end of last month to 4.2% by increasing our holdings in large cap names that are typically the main beneficiaries each time there are large inflows of liquidity into China. JD.com, Baidu, China Life, Trip.com, BYD are positions we added to. We also added to high beta names we are familiar with such as China Resources Beer, China Resources Land, Shenzhou and Xinyi Glass. One new name was added to the portfolio this month: Suzhou TFC Optical Communication, a direct beneficiary of the integration of AI in data centres as it is the main provider of optical modules to Mellanox, Nvidia’s subsidiary that is responsible for supplying critical equipment for high-speed data interconnectivity within data centres powered by AI.
ASIA PORTFOLIO
La Francaise JKC Asia Equity saw its NAV per share rise by 6.6% in September when the MSCI Asia ex-Japan index increased by 8.2%.
The cash position of the fund stood at 4.4 % at the end of the month.
The main actions taken for our Asia fund was to raise its exposure to China through selected mega caps (Alibaba, Meituan) while reducing the overall cash position. We also took some profit on Chroma ATE, a Taiwanese testing equipment company that hovers around its all-time high.
One name was added in September to the portfolio: HD Hyundai Electric in Korea, a supplier of very large power transformers which can sell for as much as USD20m a piece. Growth is driven by power grid upgrades in the US and Europe as renewal energy is becoming more and more prominent in the energy mix. Future orders are expected to come from data centres as their AI needs require immense supply of power. As an aside and a way to illustrate the previous comment, we were amazed to learn that the infamous Three Mile Island Nuclear Generating Station in Pennsylvania was to be recommissioned for the exclusive use of Microsoft’s AI-based data centres.
OUR ESG ENDEAVOURS THIS MONTH
September has been an eventful month for ESG regulations across Asian countries, particularly regarding alignment with the International Sustainability Standards Board (ISSB) rules. Both Singapore and Malaysia, which fall under our Southeast Asia coverage, have strengthened their ESG frameworks. Singapore has made significant strides towards its 2050 net-zero target by mandating corporate climate risk disclosures. These requirements aim to encourage climate-aligned investments and decision-making, especially for listed companies and financial institutions. The new rules, aligned with ISSB standards, will take effect for listed issuers starting from FY2025 and for large non-listed companies from FY2027.
Malaysia, meanwhile, has introduced the National Sustainability Reporting Framework (NSRF) to provide investors and financiers with crucial sustainability data for informed capital allocation decisions. Beginning in 2025, about 130 large companies listed on Bursa Malaysia’s Main Market will be required to report climate-related disclosures in line with IFRS S1 and S2, with the first reports due in 2026. Other companies will follow in subsequent phases, with all groups expected to include Scope 3 disclosures by 2027. The framework also mandates that sustainability reports undergo audit verification, ensuring higher transparency and accountability.
Closer to home, The Hong Kong Institute of Certified Public Accountants (HKICPA) issued new drafts of proposed sustainability-related and climate-related reporting standards for companies, fully aligned with the standards issued by the ISSB. The HKICPA said that it has proposed to fully converge its new standards, HKFRS S1 and HKFRS S2, with IFRS S1 and IFRS S2, after considering a series of factors including extensive engagements with stakeholders and the completion of a technical feasibility study on the application of the ISSB Standards in Hong Kong in June 2024.
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