Fund Managers' Report
Review
The drivers of market performance in
the first half of the current financial year were a continuation of
many of the previously established growth themes in markets such as
India, Indonesia, Korea and Taiwan. China underperformed again
despite a host of government measures to support the economy.
Concern remained around property, local government indebtedness,
deflation and geopolitical risk, despite a meeting between Xi and
Biden, which dampened investors' interest. At a global level the
actions of the Federal Reserve once again dictated sentiment for
equities. This time, expectations of peaking interest rates after
softer Consumer Price Index and employment data, followed by
supportive comments from the Federal Reserve, led to forecasts for
rate cuts in 2024. This context was supportive for equities
generally.
The period ended positively with the
FTSE World Asia Pacific ex Japan Index up 5.1% as a number of
different market themes flourished simultaneously. Strong guidance
from the dominant US companies in the sector driving the artificial
intelligence (AI) sector revived this theme. This boosted the
performance of the technology sector in our region particularly in
Korea and Taiwan. Another dominant theme was corporate reform, with
the Korean government recently announcing a wide-ranging initiative
to improve shareholder returns, taking a leaf out of Japan's book.
This 'Value-up' initiative has been received very positively by the
market. Finally, India was another bright spot as macro-economic
data continued to strengthen, which led to a broadening of market
performance. This favoured the more value-orientated sectors where
we have exposure, such as energy and utilities. It is encouraging
that the re-positioning of our portfolio at the beginning of the
period captured performance in many of these areas.
We remain focused on re-establishing
the capital performance of the Company and a number of themes which
are unique to our region were highlighted in the most recent annual
report. The portfolio had been re-positioned to take advantage of
opportunities with a compelling capital and dividend growth
trajectory. These include the build-out of green infrastructure,
strong consumption trends, technology supply chains supporting
global innovation as well as financial inclusion as household
wealth increases.
The Indian market was the best
performer in the six month period as positive macro-economic data,
robust corporate results and local state election wins by Modi's
BJP boosted hopes of a continuation of the supportive economic
policy with a general election due to take place later this year.
Taiwan also performed strongly, supported by positive guidance from
technology names such as TSMC and other AI beneficiaries. Korea
delivered solid results driven by the performance of technology
names and latterly government efforts to improve shareholder
returns.
China and Hong Kong were weak in the
period owing to flagging economic growth and an ineffective
response to key domestic structural issues. However, we have
tentatively added to our existing positions in these markets. This
was motivated by recent signs of stabilisation in the property
market and some positive indicators following Chinese Lunar New
Year data, which indicated some pick-up in consumption trends and
robust travel data. There are ongoing efforts from the government
to provide piecemeal stimulus to support the equity market which,
along with compelling valuations, may provide more
opportunities. However, we remain comfortable with our
current underweight position. In terms of sectors, technology
and utilities stand out as key performers whilst real estate was
the notable underperformer.
Performance
The NAV total return was 8.2% in
sterling terms over the period, ahead of our peers and ahead of the
FTSE World Asia Pacific ex Japan Index which returned 5.1%.
However, performance was behind the more concentrated MSCI AC Asia
Pacific ex Japan High Dividend Yield Index which returned 10.0%. We
are seeing some early evidence that the repositioning of the
portfolio towards the key structural growth drivers in our region
is having a positive impact on performance.
The Company's performance greatly
benefitted from our Indian holdings with Bharat Petroleum, Power
Grid, NTPC, ONGC and HCL Technologies all appearing in our list of
top contributors. The other positive area was technology with the
likes of TSMC, Mediatek and Samsung Electronics key contributors.
Our other recent holdings of Kia Corp and Wesfarmers, an Australian
conglomerate, were also in the top ten contributors. Performance
was negatively impacted by our China holdings with JD.com,
Guangdong Investment and Li Ning remaining weak as Chinese economic
data continued to falter.
Revenue
The income from investments fell 18%
from the same period last year, while income from option writing
more than doubled, increasing by 107%*. Total income fell by 3%
compared to last year.
The key reason for the decline in
income from investments was due to the change in ex-dividend dates
for our Korean holdings which are paying large dividends in March
rather than the usual December date. This is part of a raft of
measures from the Korean government to reform corporate structures,
a very positive development given our large weighting.
We have modified our options
strategy to focus largely on writing call options with much less
emphasis on writing put options. We feel this will reduce the risk
profile of the strategy and has helped to increase income by using
smaller positions over a wider number of underlying
holdings.
Portfolio activity
We view the current Korean corporate
reform as potentially very exciting and added exposure ahead of the
official announcements. This was funded by reducing our positions
in India where the market had performed well but where we see less
upside for our stocks following strong moves. Additionally, Korean
stocks are demonstrating higher dividend growth this year. We
remain focused on opportunities arising from this reform with the
purchase of insurers DB Insurance and Samsung Fire & Marine and
the auto companies Hyundai Motor and Kia Corp. All of these names
have performed strongly following the government's reform
announcements. We sold LG Corp and SK Telecom to fund these
positions.
We added Netease, a gaming company
in China with an outstanding pipeline of new games, an established
reputation in the sector and the prospect of increasing dividends.
We have added further to our existing positions in China where
valuations have become more attractive without any change in the
fundamentals of the key areas in which we have invested in, namely
infrastructure, technology and domestic consumer brands.
Outlook
Whilst the challenges faced by China
dominate headlines, there are numerous bright spots which we expect
to be positive for performance. We expect this to continue as the
likes of India, Indonesia, Taiwan and South Korea provide
compelling exposure to growth themes in our region. There is also
evidence of dividend growth in areas such as Indonesian banks,
Korean corporate reform names and Taiwanese technology companies.
If the recent stabilisation in China macro-economic data develops
into a more positive trend, then this, along with potential
interest rate cuts, in the second half of 2024, could provide a
further boost to our markets.
The growth differential between Asia
and the rest of the world remains wide and valuations continue to
be attractive. We are observing significant opportunities to
accumulate quality companies which are growing their earnings and
increasing their dividends across many of our markets. The outlook
for dividends in the region remains robust. Positive free cash flow
generation alongside the strength of balance sheets, with record
cash held by corporates, provides a strong backdrop across several
sectors and markets across our region.
Sat
Duhra
Fund Manager
25 April 2024
*Excludes
interest
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