Asia Small Companies: July 2021 Monthly Commentary

The past month has seen an 8% increase in the official number of Covid-19 cases globally, a small acceleration from the 7% growth rate recorded in the month of June. Asian equity markets for small to mid-sized stocks in July ended the month down 2.2% in USD terms while the weaker Australian dollar restricted the loss to 0.1% in AUD terms. In the year to date the index has increased by 6.5% in USD terms and 11.8% when measured in the AUD.

The markets were relatively quiet for the first half of July and then reacted negatively to a series of policy announcements in China which resulted in a 10.4% decline in the China index and a 7.5% decline in the Hong Kong index where many of the Chinese companies are listed. With the Communist Party of China (CPC) having recently celebrated their 100 year anniversary, there was always likely to be some moves to reaffirm communist ideology and that came in late July with announcements regarding the pricing of property, technology and education in the private sector. This doesn’t mark the start of wholesale state intervention with the intention of controlling prices in these sectors, it is just a clumsy reminder of the CPC’s power. As an international investor participating in China, in our case via companies listed in Hong Kong, we accept that there will be higher volatility that other markets in the region, in part as a result of the sometimes heavy handed approach of the CPC. The long-term trend for China remains on course to change from an insignificant percentage of global portfolios to core holding levels that properly reflect the market capitalisation which currently stands at the equivalent of USD 12 trillion versus the United States at USD 39 trillion. We are maintaining our exposure to China.

The market in Japan was relatively quiet during July with a decline of 1.0% for the month. Our portfolio of Japanese shares managed a modest gain during July with the best performing company being Daiwabo Holdings up 17.7%. Daiwabo was a traditional textiles business which has been transformed into an IT infrastructure distribution business in recent years. The Company recently announced plans to improve corporate governance by adding two independent directors to the Board, taking the independent directors to the majority with four of the (now) seven seats. The Company recently executed a share buy-back programme and has responded positively to suggestions raised by their largest international shareholder. Daiwabo Holdings is displaying the improved corporate governance behaviour we seek from our investments in Japan.

Japan announced another strong monthly trade number for June with exports recording growth of 23.2% in the first half of the year, the first growth seen in five (half year) periods and the fastest growth since the first half of 2010. Japanese exports to the United States increased by 85.5% in the year to June with strong demand for both cars and car parts.

The market in Taiwan fell by 2.7% during the month, however, seven of our eight holdings in that market increased in value with the best being financial services business Chailease Holding Company which increased by 14.3%. Chailease is a leasing, instalment payment and receivables transfer business which recently announced first quarter profits growth of 26% year-on-year and increased their dividend for the fifth consecutive year. In line with common practice in Taiwan, the Company pays both a cash and share dividend, the former increased by 8% and the latter by 25% for the payment due to be paid to shareholders next month.

In South Korea the market fell 3.6%, however, our portfolio was able to benefit from the holding in LS Electric Co. which increased by 17.1% following the announcement of Q2 results with net profits rising 58% on sales growth of 8% year-on-year. The South Korean economy recorded GDP growth of 5.9% year on year to the end of June, the fastest rate in a decade, although this was just below the 6% growth rate expected by the market. Recent moves by the government in response to accelerating coronavirus infections are likely to see the economy slow in the second half of 2021 and that has subdued sentiment in the equity market for the time being.

Singapore with an increase of 1.7% was our only investment market in the region to record a positive return during the month. Our best performing stock in Singapore was Singapore Exchange Limited which gained 9.2% having reported strong market volumes in the trading of derivatives and the acquisition of a currency trading platform.

We maintained 74 holdings in the portfolio during July and remain 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.