Reflections and predictions for Asian markets
While people in China use the lunar calendar and still have one month to go before the year of the Horse starts, our investment team – like the rest of the fund management industry – follows the solar calendar. We have now formally started a new year and it’s a good time to reflect on the past year and the outlook for 2014, which we will also do in the coming weeks during our East Capital Seminars series.
Last year proved to be challenging for most emerging markets, due to concerns about when the US FED would begin to reduce its economic stimulus. Countries which are more dependent on external flows were the most seriously impacted. In our Asian investment universe, Indonesia was the most affected and the rupiah lost 24% against the EUR, leading to negative returns in the equity market. In hindsight, our decision to keep a low exposure to Jakarta-listed stocks in the East Capital China East Asia Fund was right.
Another observation from 2013 is that whereas in Eastern Europe the smaller equity markets, often called “frontier markets”, clearly outperformed the larger emerging markets, in Asia it was more of a mixed bag with most markets ending in red in EUR terms as all currencies depreciated.
Vietnam – which we have now added to our list of investment countries – was a clear outperformer, ending 20.9% up (14.8% in EUR terms). Our latest trip to Ho Chi Minh City made us excited about the long term economic prospects for the country. Contrary to its neighbours Cambodia, Laos and Myanmar, there is a relatively well-functioning stock-exchange market in Vietnam. Hong Kong was slightly negative, down 1.7% in EUR terms. In this environment, our funds actually did very well in relative terms, with the China fund up 5%, 580 bps over its benchmark index and the China East Asia Fund up 2.3%, 370 bps over its benchmark index.
Last year was a busy one for our team. We were granted a so called QFII license and RMB quota to get access to the Chinese A-shares market, which is very interesting as it offers a direct play on the RMB appreciation trend, shows low correlation to global markets due to the quasi-absence of foreign investors, and also provides wider opportunities to get exposure to attractive investment themes that are less available on the Hong Kong market. We also widened our geographic focus with more resources and investments for Southeast Asia. Eventually, we decided after a three-year period in Shanghai, building the foundation of enhanced long term asset management, to create a research advisory hub in Hong Kong. This provides us with an efficient platform to invest both in China and the rest of Asia.
Looking to 2014, we expect China to do well as valuations have a potential to re-rate on the back of pro-market reforms that were announced at the Third Plenum. The ambitious reform package will however most likely not mean that economic growth – still quite high at around 7-7.5% – will accelerate, as some of the reforms will inflict some pain. Examples include plans to reduce overcapacity, close down polluters and address the massive debt of local government. Outside of China, we believe that Taiwan and Korea will continue to benefit from an improved external environment, while ASEAN countries remain vulnerable to tapering effects, at the same time as facing macroeconomic and political challenges in some cases. A lot of the bad news, though, is priced in and we have identified several very interesting investment cases for which current valuation levels are compelling.
