Chindia Equity Fund - February 2020

Summary

  • Our Chindia Fund declined 2.4% against the emerging market universe which fell 4.7%. The Chinese portion of the fund, which has been negatively impacted by the Coronavirus, declined 5.1% which was slightly worse than the Chinese equity index decline of 4.7%. The Indian portion of the fund rose 0.9% while the market fell 0.8%. India has, to date, been insulated from the impacts of the Coronavirus.
  • Outperformance in India was driven by the strategy’s industrial holdings as stimulative measures are having a positive impact on leading indicators. In China, the consumer and industrial sectors were most impacted by the Coronavirus pandemic.
  • We envisage that investors will remain cautious on emerging markets in general, and China more specifically, while uncertainty as to the degree of seriousness of the Coronavirus remains. This may present opportunities to enter high quality commodity and Chinese exposed companies at depressed prices.

 

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Market update

Equity markets initially began the year strongly with high hopes of further progress on the USA-China trade deal and continued support from central bank policies. Mid-month, recognition of the rapid spread of the Coronavirus had a negative impact on share prices, particularly for the fund’s Chinese holdings. The fund declined by 2.4% against the emerging market universe which fell 4.7%. A 50-50 blend of the India and China indices fell 2.8%.

The speed of the spread so far of the Coronavirus has outstripped that of recent pandemics. This is due to a number of factors including the mass migration within China to celebrate the New Year and the two week period during which infected people show no symptoms but are contagious. Attempts to reduce the spread of the virus will reduce economic activity. The Chinese portion of the fund declined 5.1% which was slightly worse than the Chinese equity index decline of 4.7%. Consumer and industrial companies most impacted included Sinotruk (subsequently sold), and Anhui Conch Cement. While there remains uncertainty over the seriousness of the viral outbreak share prices are likely to remain subdued.

India has, to date, been insulated from the impacts of the Coronavirus. The Indian portion of the fund rose 0.9% while the market fell 0.8%, the outperformance was driven by the industrial holdings. The basket of stimulative measures adopted in India within the last six months are having a positive impact on leading economic indicators. At a stock specific level, chemical company Aarti Industries rose 18.6%, with short term forecasts increasing on the belief that the firm will benefit from reduced production by Chinese chemical makers. Bandhan Bank reported in-line results but saw shares fall over 10%, due to concerns over a rise in gross non-performing loans. The majority of these came from the firm applying more rigorous criteria to loans acquired from the Gruh Finance Ltd. business. We view this as a one-off and expect that the improving prospects of economic growth will not result in a need for higher loan provisions.

We envisage that investors will remain cautious on emerging markets in general, and China more specifically, while uncertainty as to the degree of seriousness of the Coronavirus remains. Peak levels of concern normally coincide with market lows. Judging these peaks and troughs is only easy in hindsight. Once the viral threat diminishes emerging markets look set to benefit from increasing global trade and potentially a weaker USD. For long term investors having exposure to good companies in some of the world’s fastest growing markets ought to provide good returns.