Asia Small Companies: November 2019 Commentary
Portfolio Comments for Asia Small Companies
November 2019
We enjoyed a strong month with our portfolio up 3.8% in AUD terms, versus the 2.0% return recorded by the benchmark index. In the year to date the gross portfolio return of 19.2% in AUD terms is well ahead of the index return of 14.9%. Our positions in Japan and Taiwan especially in the technology sector have helped the overall performance of the portfolio.
The long awaited phase one of the trade deal between United States and China wasn't signed during November and the expected completion date pushed out to 15th December. Market responses to positive and negative news associated the likelihood of a deal being signed have become more muted in recent months. Sentiment was depressed in the final week of November when President Trump signed the U.S. Bill supporting protestors in Hong Kong, an action that angered the leadership in China and could well add to delays in signing the trade deal.
The markets that have generated most performance in the current year are Taiwan up 23.8% and Japan/Singapore both up 16.3%. Order flows into the Taiwanese electronics sector from the United States have been very strong in 2019 in a reaction to trade tensions with China. China itself has recorded a gain of 8.9% despite those trade tensions with the United States. Hong Kong which continues to struggle to restore law and order in the face of widespread social unrest has nevertheless achieved a small gain of 2.7%. The only one of our investment markets to display significant weakness is South Korea with a fall of 15.4% largely as a result of the poor state of relations with Japan which has put imports of key electronic components from Japan under the threat of restrictions. South Korea's boycott of Japanese goods and travel to Japan seems to have backfired. Towards the end of November South Korea announced that they would renew their intelligence sharing pact with Japan. We are hopeful that this marks a step back towards normalised relations between the two countries and offers the chance for a strong recovery in the South Korean market in 2020. The wide dispersion of returns achieved between Taiwan and South Korea shows the benefits of diversification across markets, the sharp falls in South Korea haven't damaged the overall performance of our Fund which has delivered a strong positive return ahead of the benchmark index in 2019.
We added one new position to the portfolio in November, the Japanese retail pharmacy and medical dispensing group Sugi Holdings. Sugi Holdings started as a business of the Sugiura family who still retain a 33% stake in the USD 3.5 billion company. Sugi Holdings has a balance sheet with net cash, high quality earnings with a strong demand profile and trades on a 20x price earnings multiple which is modest for the consumer staples sector. We also added to existing positions in Toho Holdings and Tokuyama Group.
Four of our companies registered double figure percentage gains during the month, the best being conveyor belt sushi restaurant chain Sushiro Global Holdings up by 15.8%. Other companies with strong gains were Novatek Microelectronics in Taiwan + 14.0% and in Japan, Zeon Corporation +13.4% and Tokyo Seimitsu +12.0%. Open House announced full year revenue up 38% and profits up 23%, the shares at one stage rallied by 26% then closed the month with a gain of 5%. Mapletree North Asia Commercial Trust was marked down 7.8% due to damaged sustained at their Festival Walk property in Hong Kong due to the protests, we believe that insurance will fully compensate for the damage and the sell-off is an overreaction, we are retaining 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.