Asia Small Companies: September 2020 Monthly Commentary


The past month has seen a 33% increase in the official number of Covid-19 cases globally, a deceleration from the 47% growth rate recorded in the month of August.Asian equity markets for small to mid-sized stocks in Septemberended the month +1.0% in USD terms. In a reversal of the recent trend, Australian based investors were able to benefit from a weaker Australian dollar which resulted in a return of +4.2% for the month in AUD terms. In the year to date the markets havelargely recovered the Covid-19 losses from the first quarter to stand at +0.1% in USD terms and just marginally lower at -1.8% in AUD terms.

September was a month of muted returns in the major markets of Asia, Japan recorded the strongest numbers at +3.2% while China was the weakest at -3.5%. In recent months we have been accustomed to much larger month to month returns, approaching and sometimes exceeding double figure percentage changes. While we have an index that is broadly even since the start of 2020 the range of performance between markets is wide, the best being China up 19.9% while Singapore has fallen 15.8%. It was a big ex-dividend month for Japan with approximately half of all companies in that market adjusting for dividend payments on the 29th of the month. Companies in Japan have a habit of selling off in the immediate period after the ex-dividend date by more than the dividend amounts and this time was no exception with the market ending well below the highs recorded before the ex-dividend adjustments.

September was another month of trade tension between the United States and China especially in the field of semiconductors with suppliers of equipment to China’s Semiconductor Manufacturing International Corporation being threatened with requirements to apply for individual export licences. In situations like this the market often looks towards companies in Taiwan as beneficiaries if companies in China lose orders from the United States.Shares in Taiwanese semiconductor manufacturer United Microelectronics Corporation which we hold in the portfolio increased by 34.7% in the month and 80% for the quarter as a result of excellent results and being seen as a beneficiary of the action being taken against Chinese semiconductor companies.

Bloomberg reported that China has fallen further behind the target for imports agreed in the phase one trade deal with the United States, at the end of August China had purchased less than one third of the full year target of USD 170 billion leaving an outstanding balance of USD 115 billion to be purchased in the final four months of the year. The United States response to any failure to meet the commitment made in the phase one trade deal will depend on the result of the upcoming Presidential election. During early September, the World Trade Organisation ruled that the original set of tariffs imposed on USD 200 billion of exports from China was inconsistent with global trading rules. The United States could appeal that ruling however that is likely to enter a legal void since the United States has blocked the appointment of judges leaving the appellate body of the World Trade Organisation short of the minimum number required to hear cases.

The key political event during September was the election of Japanese Chief Cabinet Secretary Yoshihide Suga as party leader and Prime Minister of Japan. Mr Suga, 71, spent nearly eight years as Chief Cabinet Secretary in the Shinzo Abe administration and is seen as likely to continue the same policies as Mr Abe. In particular we will be watching for a continuation of the policies allowing a greater flow of immigration in order to address Japan’s serious demographic problems. Covid-19 has completely stopped the movement of people into Japan during 2020 and we will be looking to the new Prime Minister to enact measures to accelerate immigration during 2021 and beyond.

In a move which we take as a sign of increasing confidence, China’s foreign exchange regulator granted new quotas under the outbound QDII scheme from $104 billion to $107 billion. China keeps a tight hold on official outbound capital movements and only allows the numbers to rise when there is confidence regarding the economy.

We made a small adjustment to the portfolio in September selling two companies that had seen sharply reduced scores in our assessment of value, momentum and quality (VMQ), Dowa Holdings and Tokyo Century Corporation in the materials and financial sectors, respectively. We made purchases in the same sectors, recycling business Asahi Holdings and abrasives manufacturer Fujimi Incorporated both in the materials sector and investment management holding company SBI Holdings in the financial sector. All three of the additions to the portfolio score in the top 15% of all companies in the region in our assessment of VMQ.

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.


DISCLAIMER
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.