Over the month the fund declined in value by 0.2%.
April proved to be the first month in a while that we saw some meaningful rotation in the geographic performance of the fund. Our weakest markets were Taiwan, Mexico and Brazil, largely triggered by resurgent concerns over the path of US interest rates. Our top performers were in China/Hong Kong, Chile and Greece.
Considering the performance of Taiwanese technology in the first quarter it’s not surprising to see it take a breather. Valuations and yields had become somewhat stretched following significant local ETF inflows, so we’ve continued to exit positions where performance was not being matched by an appropriately improved outlook. Whilst we added to some positions on weakness where this is not the case, such as MediaTek, our weighting to Taiwan has naturally declined.
In sharp contrast has been China which was strong across the board and bucked the trend of being our most reliable laggard. The best performing stock in the portfolio was Fufeng, which is a food additives and flavoring manufacturer, followed by Swire Pacific and Sinopec, but all our Hong Kong positions were either flat or up over the month.
Although we’ve been cautious on China for a number of years, attractive valuations have meant that we’ve maintained a full weighting of 20%* since the second half last year. At the start of this year, MSCI China was trading on a forward P/E of 8x, right at the bottom of the historic range and juxtaposed with the valuations of the US which is at the upper end of its range.
Many of the structural headwinds remain unresolved, but our base case has been that the reality on-the-ground is not as bad as the market perceived. The economy is still highly unbalanced with domestic consumption underrepresented and overcapacity in the manufacturing sector which pushes exports into the rest of the world, most clearly seen now in electric vehicles.
The lack of a meaningful policy to resolve the real-estate market in favour of incrementalism, has given the impression of paralysis which has also been a drag on sentiment. Some further measures were announced at the recent Party Congress and this year’s budget has also provided more funding for support measures, both of which have possibly provided a greater sense of security. There are now some indications of slightly better demand in the primary market whilst volume has also picked up in the secondary market, but this is specific to only certain regions.
Whilst we expect further cuts to mortgage rates, we do not anticipate any ‘big bazooka’ policy measures. To put it simply, the policy goal is for 5% GDP growth and no systemic shocks, which they seem to be delivering and is a perfectly decent outcome given the global context. As such policy makers are reluctant to do much more.
In the absence of a clearer improvement in the economic outlook we feel the current strength is more likely due to a normalisation of valuations from extreme levels driven by a rebalancing of under-weighted portfolios, but this could change as we move into the second half. We are keeping our exposure focused on the higher quality SOEs, well-aligned private companies that are not working in politically sensitive areas and some well capitalised real estate, which should be one of the first sectors to benefit if China is to exit from its current malaise.
*China and Hong Kong allocation is aggregated
