Asia Small Companies: July 2020 Commentary
The past month has seen a 65% increase in the official number of Covid-19 cases globally, a marginal deceleration from the 69% monthly growth rate recorded in June. Asian equity markets for small to mid-sized stocks was mixed during July ending the month up 1.5% in USD terms. The continued recovery in Asia markets was again offset by strength in the Australian currency which resulted in a 2.6% decline in the regional equity index in Australian dollar terms. During the year to date Asian small to mid-sized companies have fallen by 6.9% in US dollar terms and declined by 8.7% in Australian dollar terms.
For a second successive month the Greater China markets recorded strong performance in July in USD terms with China increasing 11.1% followed by Taiwan up 5.7% and Hong Kong up 1.9%. Taiwan ended the period at a new all-time high, a mark that has stood for three decades. Taiwan has managed to quietly manoeuvre around the global trade tensions and taken the opportunity to move some production capacity back to the domestic economy and away from China helping to boost local incomes. China managed a second month of double digit percentage gain despite ongoing tension with the United States, massive flooding and a border dispute with India. The Trump administration has continued their strategy of blaming China for the Covid-19 pandemic and raised the diplomatic stakes in July by forcing China to close their consulate in Houston. China responded by ordering shut the United States consulate in the southwestern city of Chengdu, a place that is better known for excellent spicy cuisine instead of geopolitical retaliation.
Elsewhere in the region Korea and Singapore recorded gains of 10.6% and 2.3% respectively while Japan declined by 3.2%. The decline in Japan was largely in reaction to an acceleration in the number of Covid-19 cases which increased by 88% during July while the number of deaths passed 1,000 to end the month at 1,011. These Covid-19 numbers have dampened sentiment domestically although it should be noted that international investors were net buyers throughout the month of July. Towards the end of July Japanese companies started reporting first quarter results.
Public broadcaster NHK reported that Japan’s government have decided to begin discussions over easing immigration restrictions with China, South Korea and Taiwan. Increased immigration is the key to solving Japan’s demographic imbalance and declining population. In recent years Japan has adopted informal measures to increase immigration without any change to the very restrictive formal stance. We have now seen the first signs of a public policy directed at solving the declining population in Japan. We view this as a positive step.
As long-term investors we do not typically execute short-term transactions. We made an exception with BayCurrent Consulting a business management and IT consulting business in Japan that we added to the portfolio on 8th July and sold three weeks later for a profit of 49%. BayCurrent Consulting did announce a strong set of quarterly results, however, following the 49% increase in share price during month that pushed the price/earnings ratio to a level in excess of 30x we were happy to walk away with a nice profit. Two more companies in the portfolio increased by more than 40% during July, China Lesso Group jumped 48.4% and United Microelectronics Corp (UMC) by 40.6%. Plastic pipe maker China Lesso Group is a long-term holding in our portfolio and a beneficiary of ongoing urbanisation in China, the shares trade on a forward price/earnings ratio of 10.6x. Taiwanese semiconductor foundry business UMC was added to the portfolio in May and the company surprised the market in July with results more than 50% above consensus expectations of the 20 analysts covering the stock. UMC trades on a forward price/earnings ratio of 13.8x and a yield of 6%. The weakest stock in the portfolio was house builder Open House which fell by 18.9%, having previously increased by 66% in the prior quarter. Open House trades on a price/earnings ratio of 6.8x and we are maintaining our position.
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.
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