Chindia Equity Fund: July 2020

 

 

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Summary

• The Ashburton Chindia Fund (I class US$) rose 7.3% during the month of June which was in line with the Emerging Market (EM) Index
• Technology stocks performed particularly well over the month
• Global money supply remains very supportive for equity markets.

Market update

The Ashburton Chindia Fund (I class US$) rose 7.3% during the month of June which was in line with the emerging markets index.

The Indian portion of the Fund rose 6.9% which was slightly ahead of Indian equity market performance. The Pacific Asset Trust, which has 31% exposure to India, performed particularly well rising 9.2% during the month. The Trust saw its discount to Net Asset Value (NAV) narrow slightly during the month but continues to trade on a 6% discount. Bandhan Bank also performed well. Having posted reassuring results mid-May, the bank received positive comments and increased forecasts from sell-side analysts. Towards the end of the month holdings in Axis and ICICI Banks were sold and a new position purchased in DBS Bank. Neither of the Indian banks sold have earned more than their cost of equity for a prolonged time. Our investment team had concerns over their pattern of provisions, and by extension, their risk management functions. We believed that there was a possibility that COVID-19 related increases in bad loans could be worse than the banks anticipated. DBS Bank, based in Singapore, but with 30% of income from Hong Kong and China, has a long track record of superior returns on equity and has an impressively low cost to income ratio as they successfully expand into digital banking.

The Chinese portion of the Fund rose 8.1% which lagged the performance of the Chinese equity market. The increasing popularity of investing in technology stocks was evident in the monthly returns. Tencent shares rose 21.5% during the month. Tencent remains the biggest position of the fund at close to the 10% allowable limit having been trimmed a number of times. Despite renewed interest in infrastructure investment in China, Anhui Conch cement declined 6.6%. We have noted in early July trading much of this has already reversed.

Explanations of the continued rally in the equity markets include governments ending lockdowns, hopes of a COVID-19 vaccine being developed in the near future, and the self-perpetuating nature of bull markets with those on the side lines jumping in over “fear of missing out”. Our expectation of China having been the first in and hence, the first out of the COVID-19 troubles appears to be playing out. The Fund is currently tilted towards China. The continued rise of coronavirus cases in the US suggests that the ending of their lockdowns might have happened too early despite testing and tracking tools being available. We remain hopeful of successful pivotal trials of a coronavirus vaccine soon. The UK Oxford group trial being run by AstraZeneca for instance, should see results by the end of August. Governments and charitable bodies have taken the unusual step of mass manufacturing the vaccine, and several other potential vaccines, in advance of definitive clinical evidence. This could result in vaccination programs beginning as early as the end of September.

The biggest driver of markets though is likely the ongoing easing of money supply from the central banks, who continue to pump newly created currency into the world while buying up assets. It appears this “unconventional policy” is fast becoming the new normal. While we believed preventing problems of liquidity is justifiable, trying to prevent solvency issues sets up continued dependency of certain industries and economies on financial stimulus. 

One significant consequence of this monetary policy on markets is the substantial reduction in the expected returns available from other asset classes. This forces investors looking for return seeking assets to invest into equities. 

From a top down perspective, we continue to believe that the Asian ex-Japan region offers some of the most favourable demographics globally. The strength of the US$ now seems more likely to reduce, and this should favour domestic companies in Asia. Tensions between Hong Kong and China, and India and China, increased during July. We are hopeful for peaceful resolutions.