03 Dec 2019
The first thing I noticed when I arrived in Hong Kong for my Autumn visit was a big drop in humidity levels, which was a relief!
Having taken an overnight flight from Brisbane, I took the opportunity to visit the Peak area. Victoria Peak is a hill on the western side of Hong Kong Island and is the highest point, with an elevation of 552m. The original residents had to use sedan chairs in order to reach their homes due to the steep ascent from the financial district in Central. There is less humidity here than in other parts of Hong Kong and since the early 19th Century, visitors have been drawn to its panoramic view over the city. Victoria Peak is also home to many high-end properties as a direct result of the more temperate climate. The Peak is usually crowded, attracting over seven million visitors each year, but due to the unrest in Hong Kong and the dramatic decline in mainland Chinese visitors, the popular summit circuit was virtually empty. On a clear day, the views down to Hong Kong Central and across the harbour to Kowloon are outstanding.
I met up with Teera Chanpongsang, who manages the Fidelity Asia Fund. Under his stewardship, the fund has delivered excellent returns versus its benchmark index, with outperformance delivered on a consistent basis. Like all Fidelity managers on the team, Teera travels frequently to visit companies in the region. His recent research trips have included visits to both India and Korea. As a result of his travels, Hyundai Motor has recently been added to the fund. The son of the Chairman is instigating improvements in governance at company level and they are looking to the future with development of a hydrogen car in progress. The prototype was test driven by a number of managers on the research trip and was reported to have good speed and smooth acceleration, and whilst this is a project for the future, it is encouraging to see the business looking to diversify away from the traditional combustion engine. Hyundai is also currently trialling autonomous vehicles.
Teera explained that Asia as a whole is seeing a slowdown in growth, with the global Trade War a serious contributor. On the bright side, most central banks are cutting interest rates, which has helped support stock markets. The lower oil price is positive for some countries in the region, such as India, Thailand and Indonesia and within the Indian IT outsourcing sector, dollar strength has been a benefit, helping companies such as TCS and Cognizant. The fund benefits from the strength and flair of the manager, who is also skilled at utilising the strong analyst resource available at Fidelity.
The Fidelity Emerging Asia Fund is a more specialist vehicle in the area, which excludes developed Asian markets. Fund manager Dhananjay Phadnis has managed this portfolio since November 2013, with a focus on high quality compounding businesses that have the ability to re-invest at attractive rates of return. DJ, as he is known, has recently been on the Fidelity research trip to India and believes that the economy is trying to recover from two economic shocks. The first of these was de-monetisation and the second, the introduction of the nationwide Goods and Services tax with the latter resulting in businesses de-stocking inventories. Since then there has been a credit squeeze due to difficulties in the non-bank financial sector. Within DJ’s portfolio, the IT services companies, together with high quality banks, such as HDFC bank, have continued to trade reasonably well. An interesting name in the portfolio is Power Grid, a state-owned transmission utility. India remains underinvested in its electricity transmission network and, following a satisfactory regulatory review of its returns, it was purchased on a low valuation.
This fund has a bias to growth stocks, which is due to Asian value names being narrowly concentrated in a few sectors, such as the Chinese state-owned banks or teleco companies, Korean banks and energy companies, many of which are structurally challenged. This fund focuses on emerging Asia and holds three stocks in Vietnam, including Vinamilk and Vinacom, who own a number of leading retail shopping malls. Bank Central Asia is an example of a high-quality banking franchise operating in the still underdeveloped Indonesian banking market. The bank has a strong deposit base, meaning that it has a low cost of funds and is benefiting from rising penetration of financial products. The fund invests in Asia’s faster growing emerging economies, excluding Hong Kong and Singapore, and can be a useful satellite addition to investors looking for above average growth.
The FSSA Asia Focus Fund has been a strong and consistent performer within its sector and is managed by one of the region’s leading fund managers, Martin Lau. There is an emphasis on high quality businesses, such as dominant consumer franchises, Nestle India and Vitasoy. There is also a focus on beneficiaries of the rise in healthcare-spending globally, such as CSL and beneficiaries of digitalisation, such as TSMC in Taiwan, alongside conservative banks with strong deposit funding, such as HDFC Bank, Kotak Mahindra and Axis Bank.
Martin commented on the downturn in the Hong Kong economy, with tourist arrivals down by 40-50% and arrivals from the mainland having plummeted by 70-80%. Martin recognised that the whole world was slowing down and that auto sales in India have dropped by around 40%. In a world where growth is hard to come by, it’s no surprise that growth stocks continue to trade on high multiples, with investors willing to pay up for business, such as CSL in the Healthcare space and TSMC, due to the strong visibility of earnings. Martin is starting to look at companies exposed to the domestic Hong Kong economy, taking into account that the SARS crisis has presented opportunities. As a result, Swire Pacific has been added to the portfolio.
In India, investors have now come to understand that the growth numbers have been exaggerated and, although the Government has responded to the slowdown by cutting corporate taxes, this is only due to the deterioration of the macro situation. The economy is suffering from the bubble in the non-bank financial sector, which at one point accounted for around 5-7% of the total loan system, meaning that there is no systemic risk to the Indian economy. However, the removal of this extra demand has affected the housing and auto markets in particular. Martin has continued to selectively favour some IT Service sector businesses such as TCS, which have benefited from US$ strength. Amongst China stocks ‘A’ shares, Shanghai Airport, Midea and Mengniu continue to be held. HDFC Bank, India’s largest private bank, is a name which has consistently been in the top 10 holdings in the fund and has consistently gained market share. In contrast, the public sector banks are hamstrung by poor balance sheets and struggle to grow their loan books. Fund manager Martin Lau has an outstanding record of managing Asia equities over a 15-year period and this remains an ideal core holding in any portfolio of Asian collectives.
The FSSA Japan Focus Fund has enjoyed an outstanding year with fund manager Sophia Li having taken advantage of the setback in secular growth names during the fourth quarter of 2018, to top up positions in high conviction names, which have since rallied strongly. Overall the Japanese economy continues to suffer from poor demographics and a disinflationary mindset, but there are a number of well managed businesses with excellent secular growth prospects with the capacity to grow earnings by at least 5-10% per year. These include global factory automation and robotics leaders, such as Keyence, best in class consumer franchises such as Unicharm and Pidgeon, both of which are market leaders of baby care products in Asia. These high-quality brands have also had significant sales growth in China. Solution providers for Japan’s structural labour shortage, such as Recruit Holdings and internet disrupters of old school industries, such as MonotaRO are other favoured areas of investment.
A more recent addition to the portfolio is Workman, which is only followed by one domestic Japanese broker. This mid cap name is a leading supplier of B2C workwear and functional clothing at affordable prices and is benefiting form the lack of general clothing stores in rural areas. Workman is now rolling out a modern store format called Workman Plus and has quality private brand functional products priced at a third to a quarter of national brands, such as North Face. Social media has been key in boosting awareness of its products and has resulted in a rapid increase of the operating margin.
Sophia will pay a premium price for stocks, believing that today’s environment of slowing growth investors will pay up for companies that can deliver growth with certainty. The fund has focused on businesses with high earnings visibility, strong secular growth prospects and recurring base profits. The fund has been an excellent performer within its sector and versus benchmark and remains an exciting option within Japanese collectives.
A number of firms have launched All China funds to investors, which invest in both offshore Chinese shares and the domestic onshore China ‘A’ market. These funds have the ability to flex the weighting between the two different markets, according to valuation and opportunities.
The FSSA offering hit its second anniversary in November and has delivered excellent results. The focus is on domestic midcap names and, despite investor concerns, the Chinese consumer remains in a relatively strong place. One of the newer names in the portfolio is China Taiping Insurance, where a new approach by management should allow the stock to re-rate. The fund has two co-managers, Winston Ke and Helen Chen, who are both up and coming managers on the FSSA China team, with a broadly positive outlook on consumer sentiment on the mainland. Within China, there is a trend to premiumisation and, although home appliance sales in general are flat, consumers are now purchasing higher quality products to upgrade. The trend is also benefiting breweries, such as Tsingtao Brewery and Shanghai International Airport has been a very successful investment for the fund due to strong duty-free sales.
Allianz Global Investors also have an All China Equity Fund, which has been a very strong performer. Allianz have a very effective research base within the Asian region as they have an experienced China portfolio construction team, together with a very strong analyst resource. The fund is managed with strong sector diversification and has relied on efficient stock picking to deliver the outstanding returns achieved to date. One of the best performers this year has been Shanxi Xinghuacun Fenwi, a white liquor company of a regional product, now being marketed nationally. Zhejiang Dingli Machine is replacing ladders and scaffolding with automation in industry and is also seeing strong growth. In line with the current trend, the fund favours premiumisation of consumer goods, such as higher end beers, and China has reduced its VAT rate and cut individual taxes to help support consumption. There is a secular tailwind for insurance products and Ping An Insurance is a top 10 position in the fund, not only benefiting from a favourable tailwind but also successfully using Fintech.
Both of these All China offerings allow investors to have exposure to the different sectors available within China but with an overall emphasis on growth in domestic consumption. China continues to move to a more consumption-focused economy and consequently both funds are well placed to deliver gains to investors over the medium term, with both the FSSA and Allianz China teams very highly regarded within the region.
Graham O'Neill, Senior Investment Consultant, RSMR
Looking for a whole host of informative, up-to-the-minute content from the fund rating experts? Click here to head to RSMR Connected.
This information is for UK Professional Advisers only and should not be given to retail clients.The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
Rayner Spencer Mills Research Limited is a limited company registered in England and Wales under Company Registration Number 5227656. Registered office: Number 20, Ryefield Business Park, Belton Road, Silsden, BD20 0EE. RSMR is a registered trademark.