Asia Small Companies: April 2020 Commentary
The past month has seen a near four-fold increase in the official number of Covid-19 cases, a marked deceleration from the ten-fold increase recorded in March. Asian small to mid-sized equities increased during April by 9.1% in US dollar terms and 2.0% in Australian dollar terms. There were continuing bouts of extreme volatility in both positive and negative directions at various points during the month. The partial recovery in local markets was largely offset by strength in the Australian dollar which has continued to reduce the impact of global market volatility for Australian investors. During the year to date Asian small to mid-sized companies have fallen by 14.5% in US dollar terms and 8.7% in Australian dollar terms.
All of our investment markets recorded positive returns during April, the best was Taiwan up 18.4% in US dollar terms and an increase of 5.6% over twelve months, the only market in the region with a positive annual return. South Korea (+14.1%), Singapore (+10.5%) and Hong Kong (+10.3%) all increased by double figure percentages during April, while China and Japan registered gains of 7.0% and 5.6% respectively.
April was a busy month for corporate reporting and in most cases the results were pleasing, although it should be remembered that these reporting periods were largely prior to the economic impact from Covid-19. In many cases Japanese companies have refrained from their usual policy of forecasting profits for the next twelve months. Our retail pharmacy chain Sugi Holdings in Japan reported annual earnings to the end of February 2020 with earnings per share up 16.8% year on year and return on equity improved from 10.8% to 11.8%. NEC Networks reported earnings per share in the year to end March 2020 up 6.0% and return on capital of 8.8%. Video games maker Koei Techmo pleased the market with earnings per share up 12.0% and return on equity of 12.7% from 11.7%. Semiconductor testing company Advantest reported annual results that delivered a dividend well ahead of market expectations and the shares increased by 21% during the month.
Our best performing stock in April was Singapore supermarket business Sheng Siong which increased 25% in April and announced Q1 profits up by close to 50%. Sheng Siong is controlled by the three Lim brothers who started the business with a market stall selling surplus pork from their father’s farm and subsequently expanded to 59 supermarkets in Singapore and 2 in China, their shareholding in the business is now worth more than a $1 billion.
Political tension between the United States and China has continued to build during the past month, President Trump and senior members of his administration have been more vocal in blaming China for the Covid-19 pandemic. The United States is pressuring China by promoting the interests of Taiwan following the enactment of the TAIPEI Act. Former United States Ambassador to the United Nations, Nicki Halley has launched a petition for the US Congress to investigate whether China covered up the Covid-19 outbreak and supporting Taiwan’s membership of the World Health Organisation. Taiwan’s geographic proximity to China and extensive social/economic linkages left Taiwan very exposed to the Covid-19 outbreak. Taiwan has restricted Covid-19 to 432 confirmed cases and 6 deaths without the scale of economic lockdown we have seen in many countries. International travel to Taiwan was shutdown very quickly and contact tracing of all known cases has proved to be very efficient. The current United States Ambassador to the United Nations Kelly Craft added fuel to the tension with Beijing by retweeting a message that originated from the US mission in Taiwan, “Barring Taiwan from setting foot on UN grounds is an affront not just to the proud Taiwanese people, but to UN principles”. Beijing responded with their usual assertion that Taiwan “is an inalienable part of China”. This tension between China and the United States looks likely to be a feature of the remaining months of the Trump administration.
Economic news during the latter stages of April has started to show the impact of economic lockdowns in operation to varying degrees across the region. The most recent figures for department store and automobile sales in Japan recorded year on year declines of 70% and 30% respectively. Weak economic data will impact market volatility, however, short-term disruption to corporate profits will not have a significant impact on the long-term equity market returns. Japanese companies have adapted to be able to thrive in an environment of slow growth in recent years. In the past decade Japanese companies have achieved 10% annual growth of profits on revenue increases of less than 3% per annum which exceeds 8% annual profits growth in the United States on revenue growth of 4% per annum over the same period.
In this environment we have kept portfolio transactions to a minimum, our trades in April were executed only in response to client subscriptions and redemptions. The portfolio holds 60 companies and remains fully invested. We will continue to invest in Asian small to mid-sized companies with strong value, momentum and quality attributes together with accounting, strategy and governance standards that meet our requirements. Long-term returns will be generated by the ability of our companies to deliver growing profits and dividends.