Asia ex Japan Equities
Asian equities were volatile over the year as fluctuating trade tensions between the US and China had a major effect upon investor risk appetite. Overall, the MSCI Asia ex Japan NR index finished down 3.4 per cent in US dollar terms.
The final quarter of 2018 was notably weak as the US-China trade conflict worsened. This dragged Asian stock markets down, especially the more export-oriented markets of Korea and Taiwan. The US Federal Reserve rate rise of 0.25 per cent in December and guidance that potentially two more were in store for 2019 were additional headwinds. Coupled with China’s macro-economic data confirming fears of a deteriorating growth outlook for the economy, this soured sentiment.
Asian markets then staged a strong rebound in Q1 2019. The Federal Reserve signalled that interest rate hikes for the remainder of 2019 would be on the backburner amid concerns about the impact of faltering growth in Europe and China and global trade conflicts on the US economy. This brought relief to Asian stock markets. The stabilisation and tentative signs of recovery in China’s latest economic data releases, coupled with the government’s fresh stimulus measures, were also encouraging. However, a re-emergence of trade tensions in May and August soured sentiment. The unexpected breakdown of trade negotiations between the US and China led to tariffs being raised by both sides. Fears of a global slowdown reflected in a collapse in global government bond yields added to the pressures on the asset class.
After a difficult time in 2017 and 2018, which contributed to outflows of £216 million in the 2019 Financial Year, our all-cap Asia ex-Japan strategy significantly outperformed over the year. This outperformance was chiefly driven by strong stock selection, most notably in the consumer staples and consumer discretionary sectors, although sector allocation effects were also helpful, principally the large overweight in consumer staples.
Despite the trade concerns, the portfolio’s top performer over the period was Chinese sporting goods company Li Ning. Starting with a focus on tighter working capital and optimising costs, the company has followed a textbook example of reinvestment in the brand to drive sales and lift margins. Another top performer was condiment maker Foshan Haitian. The company enjoys high margins in an oligopolistic and growing market where it is gaining market share from competitors and achieving high returns on capital employed.
On the negative side, Chinese media giant Weibo and Hong Kong-listed Prada Spa were both weak amid slowing growth in China. Overall, though, stock picking in China was highly rewarding, with the above-mentioned Li Ning and Foshan Haitian helping drive our outperformance in Chinese names. Elsewhere, India was a source of alpha generation. The portfolio has a large exposure in India, and it was pleasing to see Prime Minister Narendra Modi lead the BJP to a thumping majority in the recent national elections. This paves the way for continuity for another five years, yet the immediate challenges for the Indian economy remain daunting.
The sister strategy, Asia ex-Japan Small and Mid Cap Equity, also significantly outperformed its benchmark over the period, with stock selection in the consumer sectors, healthcare and financials adding substantial value. Sector allocation effects were negative as our underweight positions in real estate and information technology provided a drag on relative returns although this was easily offset by stock selection.
The small and mid cap portfolio also benefited from owning Chinese sporting goods company Li Ning. Elsewhere, the portfolio was helped by strength in Indonesian Bank BTPS. The only noteworthy laggard was motion picture and video production company MM2 Asia.
Over the period, the investment team added to holdings in the Philippines, specifically in the consumer sector, as weak corporate earnings due to heightened inflationary pressures and poor consumer sentiment led to a sharp sell-off in several small and mid cap names. They view this as a short-term hiccup to profitability and a great buying opportunity. Shakey’s Pizza is a new addition along this theme. Other portfolio additions included Ausnutria Dairy, a Chinese dairy company focused on the mid-end and premium segment of the infant milk formula market. The firm has built up an extensive sales distribution network in China through baby specialty stores, where the bulk of sales take place, supermarkets and department stores and through e-commerce channels such as Tmall and JD.com.
MSCI AC Asia ex Japan Net Return Index (net dividends reinvested, in USD)
Fund Fact Sheets
|Fund Name||Fund Fact Sheet|
|JOHCM Asia ex Japan Fund||View the latest fact sheet|
|JOHCM Asia ex Japan Small and Mid-Cap Fund||View the latest fact sheet|