Market Review
In the fourth quarter, global equity markets were buoyant and the Asia Pacific region was no exception. This positive move was largely macro-driven, with investors responding positively to falling US inflation and the US Federal Reserve (Fed)’s decision to hold rates steady in December. Although our fund is focused on the Asia Pacific region, the events in the US drove sentiment worldwide and the region experienced a moderate ‘Santa Rally’ towards the end of the period. Around this time, more investors began to price in aggressive rate cuts from the Fed.
The falls in inflation around the world have been driven primarily by the supply side. Demand had already normalised as excess savings, accumulated during the pandemic, had largely depleted. In the first couple of years after the initial outbreak of Covid-19, there were supply constraints around the world due to various disruptions. This finally ran its course in 2023, which impacted many Asia Pacific countries due to them being critical manufacturing bases. As such, there was an oversupply situation towards the end of 2022 which resulted in an inevitable destocking cycle in 2023 for most export-driven Asian economies.
Fund Activity
During the period, the fund produced a positive return but underperformed the benchmark. It was held back on a relative basis largely by overweight exposure to China, which failed to rebound as many had expected. The most significant detractors were some of the Chinese tech names we hold – Alibaba and NetEase. In the final week of December, not only did Chinese economic data fail to show a rebound but the country’s regulators filed new consultations on the gaming sector. This resulted in a major selloff as investors feared another clampdown on the sector.
Our largest contributions came from India – with names such as DLF and Bharat Petroleum Corp – in addition to Samsung in South Korea and Goodman Group in Australia.
We started to position the fund ahead of rate cuts as it became clear that inflation had peaked. This meant we kept cutting our weighting in financials, bringing it to an underweight position, and switched some exposure to non-banking financial names. We also trimmed our energy overweight and added more to tech and other consumer names. This included adding some new positions, and we did this with Indian names SBI Life and Hero MotorCorp. Given India had such a good year last year, receiving a lot of foreign direct investment at the expense of China, stock prices have risen. As such, we are now avoiding the most expensive names.
Outlook
Market enthusiasm has now dampened relative to the final quarter despite the consensus of rate cuts led by the Fed. This year we expect Asia Pacific markets to benefit from changes in monetary policy. Asian currencies are very weak, partly due to the strong US dollar, so there is a good chance this year that we will see reasonable upward currency moves when the Fed cuts rates. This would provide a positive backdrop for Asian markets.
Even with slightly weaker consumption, if the US goes into a shallow recession, this would partly be offset by the fact the post-Covid-19 destocking issues have been dealt with. As such, we intend to add to materials, our largest sector underweight.
As Asia Pacific investors, we must be mindful of the impact of national elections this year. There are three significant ones occurring in the region – Taiwan, Indonesia and India – which we will be monitoring. That said, we do not foresee major policy shifts after those events. However, the same cannot be said for the US election, which may have significant geopolitical ramifications for China. Without this geopolitical issue hanging over this region’s markets, we would be more confident about China as its economic structural shift away from over-reliance on real estate investment is well underway, even though deleveraging is still ongoing.
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 WS 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 19/01/24
