Market Overview
In the second quarter, the Asia Pacific region underperformed the global equity market. While Asian equities lagged overall, there were exceptions, with Taiwan, South Korea and India performing well. The Taiwanese and South Korean equity markets were led by gains in tech, while India’s economy and equity market benefitted from domestic inflation seemingly peaking. The region’s markets also suffered from global funds investing elsewhere over this period, with fund managers seemingly distracted by the strong performance of US equities. We observed a notable trend of money being pulled out of China.
Asia Pacific equity markets are sensitive to global demand. The region’s role in global supply chains means it has been negatively impacted by dips in demand from US and European consumers. A lack of improvement in global economic fundamentals, with many investors anticipating slowdowns or possibly recessions in many major markets, did not help Asian exporters.
Fund Review
The fund produced a negative performance during the quarter and underperformed the benchmark. Weak Chinese data has made our overweight position in its markets a major drag on performance. Within China, our stock selection has very much been focused on the strength of the consumer recovery.
The consumer recovery surged at the start of the year, particularly in the first two months, when China removed all Covid restrictions. However, since March, pent-up demand has weakened. We believe the data wasn't as bleak as some commentators claimed, with consumer growth in the high teens. This is not poor, just lower than the significant surge in consumer spending many were expecting. The earnings of many of our Chinese consumer-exposed companies have been good. We believe the market has overreacted in its questioning of the viability of the recovery, which has led some to sell indiscriminately.
We missed out on momentum trades linked to global tech markets, especially all things AI. In Asia, there are not any dominant players, such as NVIDIA in the US. However we gained exposure mainly through semiconductor and memory, adding to our positions in Samsung Electronics and SK Hynix, a main supplier to NVIDIA for HBM chips.
Elsewhere, we lowered the cyclicality of the fund because we perceived greater risk for certain names. We did so by reducing our weighting to financials, which was one of our highest sector overweights, and reducing our exposure to the steel sector. Within the latter, we completely sold out of China Steel Corporation.
To replace these positions, we added consumer names. In India, we took a position in Bajaj Finance which, though a financial, is a non-bank entity we expect to do well, Varun Beverages was also added to the fund. This reflects the fact that we are maintaining our balanced exposure to India; at one point last year, India was one of our largest underweights, but at the start of this year we took advantage of market weakness and increased that to a level broadly in line with the benchmark.
We also added to our position in Ctrip.com in China. The travel platform company announced strong Q1 numbers and recent Chinese tourism data suggests the recovery will continue in the second half of 2023 and in 2024.
Outlook
We are maintaining our overweight positions in China and Hong Kong. We believe pessimism may have peaked around these markets, which could support a recovery in valuations in the second half of the year. We are maintaining our underweight position in Taiwan.
The Chinese authorities have already announced a GDP target of ‘around 5%’ for 2023 and we would expect policy support to be introduced if this was in danger of being missed. This year, the government has already extended a tax rebate on electric vehicles, and for property there is more room to loosen onerous restrictions and help stimulate consumer demand. Further policy support would boost Chinese equities generally. The latest regulatory reset after more than two years of a tech/internet sector crackdown in China may also provide some much-needed confidence for private companies and the wider investment community.
Generally, Asia’s underperformance year-to-date has been partly driven by the strength of the US dollar. When the dollar is high, it can be hard for Asia to outperform. Considering the US economic outlook and the actions of the US Federal Reserve, there is a chance this could reverse in the second half of the year.
Important information
The value of investments may fall as well as rise and investors may not get back the amount invested.
Due to the underlying assets held in the LF Canlife Asia Pacific Fund, the price of the fund is classed as having above average to high volatility.
The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice.
This document is issued for information only by Canada Life Asset Management. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available in the literature section.
Promotion approved 24/07/23
