Asia Small Companies: August 2021 Monthly Commentary

The past month has seen a 10% increase in the official number of Covid-19 cases globally, another acceleration from the 8% growth rate recorded in the month of July. Asian equity markets for small to mid-sized stocks in August ended the month up 2.4% in USD terms and up 2.9% in AUD terms. This represents a significant recovery from the 3% decline that occurred in the first half of August. In the year to date the index has increased by 9.0% in USD terms and 15.1% in AUD terms which reflects the recent trend of weakness in the Australian currency.

The market in China bounced back from the double figure percentage decline recorded in July with a 3.5% gain in August. As expected, China has fallen well behind the level of purchases required in the Phase One trade deal struck with the previous United States administration. Chinese authorities indicated that “normal communication” is taking place between the two governments without the confrontation that was typical with President Trump. There was little response from Beijing to various speeches by Vice President Kamala Harris as she toured SE Asia for seven days. Speaking in Hanoi, Vice President Harris indicated a need to increase pressure on Beijing regarding disputed maritime claims in the region. White House commentary surrounding the Vice President’s trip indicated that the intention was to counter China’s influence while not forcing nations to take sides between the United States and China. It was also notable that a senior Pentagon official held talks with the Chinese military for the first time under the Biden administration with a focus on managing risks between the two countries. Both sides agreed on the importance of maintaining open channels of communication between the two militaries.

In Japan, Prime Minister Suga is facing a challenge to his leadership ahead of the general election that is due by November. Mr Suga has been under pressure from weak poll results for some time and many within his party fear a potential loss of their majority in parliament in the upcoming election if he remains as Prime Minister. The Liberal Democratic Party (LDP) is set for their leadership vote on 29th September. Mr Suga became Prime Minister in September 2020 following the retirement of Shinzo Abe. Mr Suga’s approval rating has slumped as a result of the public perception of his handling of the COVID-19 pandemic. Despite this political uncertainty associated with leadership of the LDP, the equity market is performing well, rising 2% in the month of August and 18% in the year to date.

The equity market in South Korea recorded a flat month in August and a gain of 37% over a year, with continuing positive economic news released in recent weeks. Exports increased by 34.9% in the year to August, an acceleration from the 29.6% annual rate recorded in the previous month. Growth in exports is being driven by strong demand for semiconductors and petrochemicals, up 43% and 81% respectively. By region, demand for South Korean exports from Europe increased by 41% and the United States by 38%, both ahead of China at 26% growth. Strength in the economy resulted in an increase in official interest rates by 0.25% to 0.75%, the first increase we have seen for three years.

Taiwan also recorded a flat month for their equity market in August and a growth of 49% year on year. August is a popular month for share prices to go ex-dividend, with dividends in Taiwan typically paid on an annual basis. We have seen some strong growth in dividend payments driven by excellent financial performance. The equity market has managed to largely ignore the ongoing political tensions with Beijing. China held large scale military exercises while Taiwan’s parliament voted to increase defence spending and their defence minister reported on the military threat posed by China especially their capacity to launch missile strikes against key economic and military infrastructure.

We started building positions in two companies in Japan during August, MEC Company and JCU Corporation, both in the materials sector. MEC Company manufactures various chemicals used in printed circuit boards, their earnings are on a rapid growth path expected to increase by 65% in the current year, the balance sheet is free of debt, return on equity is 13% and only three analysts provide coverage of the stock. JCU Corporation provides surface treatment agents and equipment in the automotive and electronics industries, they also have a new business segment that uses plasma technology in the etching and cleaning of printed circuit boards. JCU Corporation is expected to achieve 20% growth in earnings in the current year, their balance sheet is free of debt and return on equity is 18%. Just two analysts are providing coverage of JCU Corporation.

We increased our portfolio holdings from 74 to 76 companies during August and remain close to 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.