Asia Small Companies: June 2020 Commentary

The past month has seen a 69% increase in the official number of Covid-19 cases globally, a continuation of the deceleration from the 90%, four-fold and ten-fold increases recorded in May, April and March, respectively. With stock markets around the world continuing to anticipate a recovery in economic activity as lockdown restrictions are eased, Asian small to mid-sized equities increased during June by 2.9% in US dollar terms. The continued recovery in local markets was offset by strength in the Australian currency, rising 3.7% versus the US dollar during June which resulted in a 0.8% decline in the regional equity index in Australian dollar terms. During the year to date Asian small to mid-sized companies have fallen by 8.2% in US dollar terms and declined 6.3% in Australian dollar terms.

The Greater China markets recorded strong performance in June in USD terms with China increasing 13.2% followed by Hong Kong up 10.8% and Taiwan up 8.6%. Korea and Singapore recorded gains of 3.7% and 1.9% while Japan declined 1% having increased by more than 7% in the prior month. There was positive news for China when S&P confirmed an unchanged credit rating of A+/A-1 and the Purchasing Managers Index (PMI) for June exceeded expectations in both the manufacturing and non-manufacturing sectors. This marks a fourth consecutive month in positive territory for the PMI after the lows recorded in February.

June was month of high day to day volatility in the equity markets in the region. Some of the market volatility was generated by mixed messages from the White House. Concerns regarding the state of the “Phase One” trade deal with China were raised early in June when President Trump tweeted that options were open for completely decoupling the United States from China. United States Trade Representative Robert Lighthizer also indicated that a full decoupling from China was possible in the past but not a reasonable policy option at this point in time. White House trade adviser, Peter Navarro in an interview with Fox News appeared to indicate that the “Phase One” trade deal was off. There was a negative reaction in equity markets of the order minus 2%, followed by a tweet from President Trump indicating the “China Trade Deal is fully intact” which prompted an immediate market recovery. Secretary of State Pompeo had previously met with China’s top trade policy official Yang Jiechi in Hawaii with little to say following the meeting except that Beijing had recommitted to the trade deal. This will require an acceleration of purchases in the coming months since China made a commitment to purchase USD 170 million of goods and services from the United States during 2020. At the end of May, purchases by China stood at USD 31 billion, leaving a balance of USD 139 billion in the remaining seven months of the year. These numbers are likely to draw ever increasing scrutiny in the remaining months of 2020.

China’s top law-making body the National Standing Committee passed Hong Kong’s national security legislation on 29th June which will cause further tension with the United States, the United Kingdom and European Union. The United States has started the process of terminating Hong Kong’s special status which will result in reduced access to high technology products. Hong Kong’s Chief Executive Carrie Lam was quoted as saying “I urge the international community to respect our country’s right to safeguard national security and Hong Kong’s aspirations for stability and harmony”. Under the new law Beijing is expected to set up a national security office in Hong Kong to “supervise, guide and support” the Hong Kong government.

June was a month of high activity within the portfolio as we adjusted some of the sector weights and expanded the number of holdings in the portfolio from 62 to 75. We have expanded the number of companies in the portfolio as a risk control measure in times of extreme market volatility. We reduced over overweight in the information technology sector from 6% to 4% by taking profits in Advantest and NEC Networks both of which had performed well in the current year. We sold our entire position in Japan Aviation Electronics following a sharp fall in our assessment of the prospects for that company. We added seven new Chinese companies, six Japanese companies and one new position in Taiwan. These purchases increased portfolio exposure to the consumer, health care and materials sectors using the proceeds of sales in the information technology sector.

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.

This report provides general information only and does not take into account the investment objectives, financial circumstances or needs of any person. To the maximum extent permitted by law, Delft Partners Pty Ltd, its directors and employees accept no liability for any loss or damage incurred as a result of any action taken or not taken on the basis of the information contained in the report or any omissions or errors within it. It is advisable that you obtain professional independent financial, legal and taxation advice before making any financial investment decision. Delft Partners Pty Ltd does not guarantee the repayment of capital, the payment of income, or the performance of its investments. Delft Partners operates as owner of API Capital Advisory Pty Ltd AFSL 329133.