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Ashburton Global Chindia Fund - News
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Ashburton Global Chindia Fund Comment - Dec 11
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Thursday, 15 March 2012
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Fund Manager Comment
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Review
Another tumultuous month ensued for equity markets, as prices globally continue to be driven primarily by news flow from Euroland. MSCI China, MSCI Taiwan and MSCI India posted returns of +2.36%, +2.79% and -4.38% respectively in December, amid extremely light volume, plenty of volatility and little resolution. Some degree of respite was provided by increased efforts on the part of the ECB to machinate an easing of the liquidity crisis facing European banks, but the lack of a 'Bazooka', that is a qualified statement from the ECB proclaiming itself as the lender of the last resort, means credit conditions remain acute.
The key issue for China remains policy, and more specifically whether an easing with regards to the all important property market will arrive sooner rather than later. Indeed, home prices of new private residential properties declined month-on-month in November in 49 of the 70 cities monitored by the NBS (National Bureau of Statistics), with price weakness spreading into second and third tier cities. Meanwhile, monetary policy remains restrictive despite the 50 basis point cut in the reserve requirement ratio in early December.
As for India, the news flow has continued to deteriorate. A clear impression is now emerging of a rudderless incumbent Congress government struggling to deal with intensifying in fighting within the party, with the latest embarrassing U-turn on allowing FDI retail in the country another blemish on PM Singh's tenure. This was followed by an inability to push through the long-awaited anti-corruption bill on the 29th December.
Activity
With risk aversion still prevalent across Asian markets, we have taken the decision to reduce beta within our Taiwanese exposure on account of downside risk to global growth expectations and the impending Presidential election, which is upon us in January. The outcome is far from certain, although the KMT (Kuomintang Party) has recently gained ground following incumbent President Ma's disastrous run of bad publicity. An opposition Demographic Progressive Party victory would likely result in stricter measures to control property prices and a cooler cross-strait relationship with China, damaging sentiment. With the scales in the balance, the risk-reward is unfavourable should the latter outcome arise. Consequently, we sold positions in Taiwan Fertilizer, E Ink Holdings and Yulon Motor, whilst adding technology heavyweight Taiwan Semiconductor, which continues to benefit from its dominant global position.
India's weakness on the month was partly driven by currency weakness, which led to the Rupee becoming Asia's worst performing currency in 2011. This and continuing stubborn non-core food inflation has effectively tied the RBI's hands in terms of commencing an easing cycle. Finally, the resilience of the oil price on the back of supply/demand dynamics has negative implications for the fiscal deficit given the country's substantial subsidy commitments. Accordingly, we have hedged 10% of our Indian equity exposure and expect to maintain this position until we see a fundamental improvement in economic conditions.
Outlook
Following another disappointing year of underperformance by emerging markets, investors will naturally be taking a step back and asking themselves whether the outlook really is that bleak. The short answer is no. Whilst emerging markets have certainly not been immune from the slowdown, in the main they have the advantage of strong balance sheets, flexibility in taxation laws and strong underlying demand. Perhaps the most important differentiator is that public debt in EM economies is substantially lower (38% GDP) than industrialized industrialised nations where sovereign, bank and consumer debt all remain uncomfortably high.
China remains crucial in terms of sentiment towards Asia. MSCI China is currently trading on an 8x forward P/E multiple, over one standard deviation blow its long-term average. At these levels the market is pricing in another global financial crisis, unjustified in our view because the economy is actually doing reasonably well, despite Beijing's heavy- handed attempts to machinate a sharp slowdown in key areas. Thus we would argue that real value is emerging for the long-term investor. That said, 3 key risks remain which would likely see the market get cheaper. The first is the continued failure by policymakers to navigate SS Europe back on course. The second is if Beijing remains determined to keep property restrictions in place for another year, a move that would likely precipitate a collapse. Finally, it could be argued that analysts are still too optimistic regarding their growth assumptions for companies next year, meaning a further wave of downgrades across sectors may be forthcoming.
And, much like America, 2012 is a key political year for many Asian economies. There is the issue of the Chinese Party Leadership transition, Presidential and Yuan elections in Taiwan and several key state elections in India. In addition to an already uncertain outlook, one thing is for sure. 2012 is likely to be another fascinating year...
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Ashburton Global Chindia Fund Comment - Sep 11
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Thursday, 29 December 2011
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Fund Manager Comment
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Review
Global equities continued their unrelenting march south through September as markets struggled to digest news that Greek authorities would fail to meet deficit targets imposed by international lenders as part of the country's bailout and the German Economy Minister's comments that Europe's powerhouse 'won't give more to the EU bail-out fund'. A clear dislocation has manifested between markets that are signaling fear over a lack of leadership and credible responses in addressing the big issues, and politicians who feel they have the luxury of time on their hands. Bold and decisive action is required. MSCI Greater China and MSCI India posted returns on the month of -15.1% and -0.7% respectively. In China, the manufacturing PMI rebounded to 51.2% in September from 50.9% in August, suggesting there isn't any imminent hard landing risk amid the worries of external deterioration and domestic over-tightening. M2 growth continued its downward trajectory, since monetary tightening was introduced late last year buy decelerating to 13.5% in August, the slowest pace since 2005. August CPI eased to 6.2% YOY from 6.5% YOY in July, reaffirming our view that inflation likely peaked in July. Thanks to an increasingly favourable base effect, we expect CPI to record a gradual decline during the remainder of the year, although policymakers will unlikely drop their guard whilst the nominal figure exceeds 5%. In India, the RBI hiked by 25bps at its mid-September mid-quarter monetary policy review, citing persistent inflation as the key factor. WPI surprised the market to the upside, rising to a 13 month high in August. A wait and watch stance will now likely be employed, with future action contingent on inflation news. Expectations for aggressive policy tightening throughout this year remain misplaced.
Activity
Emerging markets (particularly those in Asia) have been hardest hit YTD, even though the epicentre of the latest financial and political storm lies far away. However, we have also witnessed a re-emergence of hysteria concerning China and its supposedly imminent collapse. Indeed the current environment has more than a whiff of October 2008 about it, not only in the unrelenting selling of stocks but also the deluge of reports from brokerage analysts predicting doom for the Chinese economy. It is fair to say we have been surprised by the speed and severity of the sell-off in Chinese stocks. The action has been brutal and indiscriminate, across all sectors and the quality spectrum. Whilst our Indian stocks have been performing well, the performance of our China stocks of late has certainly been disappointing. Whilst we have pared back some of our more high beta positions, we are loath to sell companies that we continue to like due to price action alone. Given our base case outlook for both markets, trading activity has therefore been kept light.
Outlook
China's shadow banking sector is the source of much of the recent angst. We hear reports of stress in the system as financing costs have risen, leading to defaults in various parts of the private sector. Shadow banking has grown very strongly over the last few years, and it is outside the formal loan quota system that exists in China. Of course shadow banking is not unique to China and has been practised globally for decades; think of financing of consumer goods by consumer goods manufacturers (Ford, Toyota, GM) or credit given by manufacturers of Industrial goods to their clients. In fact the state owned Chinese banks themselves have carried out most of this informal lending, and crucially it has been done with the implicit backing of Beijing.
One of the most valid criticisms of China's loan quota system is that it encourages wasteful lending without a proper regard to loan pricing. This is why the shadow system is important - in many respects it is a government-approved experiment in the proper pricing of capital that in the long run is essential to China's development. The market at current levels is implying either that Beijing has no further policy options available, or that simply it is too late to do anything anyway. This in our opinion is wrong. The lesson from 2008 should tell us that policy can and will be changed very quickly if growth is in real danger of a dramatic slowdown. One of our favourite quotes regarding India is that 'the shortest distance between two points is never a straight line', and today's environment is a perfect example. The current decision-making freeze within government is hampering reforms to address basic infrastructure needs and chronic supply constraints, whilst continued inflationary pressures and weakening corporate earnings have (rightly) been concerns. In response, the RBI has tackled inflation head-on with aggressive monetary tightening, whilst also maintaining a flexible exchange rate. It is now in a position Western central banks can only dream about. As for politics, India's growth story is all the more unique because it is happening despite government, not because of it. Agreed, there can be no India story if government does not work to fix the problem and it will, though expect the pace of reform to be incremental and uneven.
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Ashburton Global Chindia Fund Comment - Jun 11
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Monday, 12 September 2011
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Fund Manager Comment
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Review
Equity markets in Greater China and India found the going tough during a traditionally difficult period, as lack of domestic catalysts and investor preoccupation with events in America and Europe weighed on sentiment. MSCI China, MSCI India and MSCI Taiwan returned -4.5%, +0.58% and -4.6% in June respectively. Jitters over proposals to increase the US Federal Debt ceiling were augmented through the month, as both sides continued their tedious battle of blaming each other for the stymied negotiations to allow the Treasury to continue borrowing money to finance government operations. In Europe, Greece Prime Minister Papandreou survived a vote of no confidence before successfully pushing through an austerity plan aimed at meeting European aid requirements and staving off default for his debt-laden nation. In China, channel checks across autos, retailers and property transactions all point towards a continued slowdown in demand, as banks continue to constrain credit through restricted lending policies. The issue of local government financing is also beginning to gather steam, with Beijing releasing an audit review close to month-end, suggesting a local government debt level of RMB 10.7 trillion. On a more positive note, Chinese premier Wen Jiabao sparked some excitement after declaring an inflation victory in his interview with the FT, stating, 'We are confident price rises will be firmly under control this year'. India's uncertainties - the magnitude of policy tightening, the extent of demand destruction, direction of future government policies and global growth transparency - are well flagged but may continue for some time.
Activity
Despite largely negative news-flow this month, we are finding plenty of interesting ideas at the stock level that excite us. Our major strategic decision this month has been to sell a handful of smaller stocks where we feel execution has been lacklustre and there exists a dearth of short to medium-term catalysts. Worries over the slowdown have created some interesting opportunities amongst liquid, high-quality names that have corrected with the market. Eva Precision, Honghua Group and Wasion Meters have been replaced by Anhui Conch, HTC and Lenovo, which play into Chinese construction (particularly social housing where we feel progress is surpassing expectations), smart-phones and tablets respectively. India cements will also be replaced by DLF Group (India property).
Outlook
Kicking the can down the road' and 'hard landing' have become choice phrases during June. As we survey the market environment today, one has been achieved (Greece) and one avoided (China's hard landing). The issue of local government debt financing in China and subsequent pressure on Chinese banks, as investors fret about i) rising NPL's and ii) the prospect of the banks having to pay national lip service in the form of a bailout, is the reason why the sector is cheap at present. We have not held any Chinese banks for some time now and we do not feel compelled to rush in at this stage. For us, the local debt issue is a Chinese Communist Party debt issue and has been well flagged within Beijing HQ for some time. The bottom line is that whilst the headline figures are scary at first glance, the debt is manageable in that we do not foresee the meltdown scenario some are envisaging. However, we will continue to monitor events carefully. As for India, the uncertainties previously mentioned have been alleviated to some extent by the correction in the oil and commodity complex which will positively impact the fiscal deficit. Also encouraging was the government's long overdue decision to raise both diesel and cooking oil prices, a bold political move following many months in the wilderness and moreso given that WPI inflation is already running at uncomfortable levels of +9% year-on-year. At this juncture and with so much noise around economic data-points and surrounding political events, we realise a much better sense of where companies are headed through spending as much time as possible talking with and meeting company management. Our view is that whilst the headlines are portraying a fairly gloomy picture, the message from the ground is much more positive.
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Ashburton Global Chindia Fund Comment - Mar 11
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Tuesday, 24 May 2011
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Fund Manager Comment
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Review
We commented last month that given the fragile economic backdrop we had expected periods of elevated volatility in 2011, yet investors had already been subjected to several Black Swans in the shape of riots, revolutions and civil wars across North Africa and the Middle East. Hopes of a respite in March did not take long to recede as focus shifted to the uprising in Libya and US-led efforts to unseat Colonel Gaddafi, giving rise to oil price increases on potential supply disruptions and whether the threat extended to larger players like Saudi Arabia and Iran. Mr Market was barely able to catch his breath before a cataclysmic event befell Japan on Friday 11th in the shape of the Tohoku earthquake, the largest in the country's history. Initial media footage from Tokyo suggested that structurally the country had survived reasonably well, but a short time later the tsunami waves that were triggered by the thrust created widespread destruction and carnage along the Pacific coastline of Japan's northern towns. Our thoughts go out to all those people affected as they struggle to rebuild their lives; the nuclear power situation in Fukushima remains fluid and we are watching developments closely. MSCI China gained 3.8% ($ terms) on the month as loan-growth, M2 and trade data for February were generally weaker than expected, suggesting that as growth slows, so the need for continued monetary tightening will dissipate. Individual measures targeting the banking and property sectors, the two most highly-correlated to Shanghai A-share market performance, also appear to be gaining traction which is precisely what Beijing is looking for before stepping off the brake-pads. MSCI India posted a gain of 6.6% ($ terms) as investors continue to seek value in banking, consumer and infrastructure stocks that we heavily sold-off over the past few months.
Activity
Our key message this month is that we have turned bullish on China. First and foremost, the standard argument for avoiding China in favour of emerging market peers or the ultra expansionary policy-fuelled Western markets has been that China is in 'tightening mode'. History shows us it has rarely paid to bet against Beijing and this cycle has supported that argument as the Party has attempted to rein monetary policy back in to pre-stimulus levels. Inflation, property and loan growth data all suggest to us that we are approaching the end of the cycle if we haven't already, whilst valuation support and recent announcements from Beijing provide added comfort. In addition, The 11th China National People's Congress has recently concluded with a clear mandate that targeted economic growth for the next five years will be 7%. The number itself is irrelevant as no doubt this will be exceeded, but the manner in which it has been accepted by the market is pleasing - not so long ago, anything short of the 'magic 8% figure' needed to ensure employment (and by extension social stability) would have been met with consternation. At the market level, analysts have not been shy to downgrade forecasts over the past 12 months and with consensus numbers now expecting somewhere in the region of 12-13% EPS growth for 2011, upside risk across selective sectors is achievable. We are also impressed with the A-share market action which has now been outperforming Asia ex-Japan in dollar terms for the past two months. (For a full description, please read our recent strategy note - 'China's Glass is Half-Full - We Are Drinking!''). We have positioned the portfolio accordingly. Exposure to our Industrial Advancement theme has been increased with the addition of Boer Power (electrical efficiency systems) and Wasion Meters (power meters and power management software), whilst we have introduced China Oilfield Services (energy), Focus Media (commercial media advertising services) and added to Sparkle Roll (luxury consumer). As for India, we remain cautious short-term on fundamental headwinds; (1) downside risk to earnings from inflation and interest rates; 2) sticky inflation and 3) higher commodity prices. In addition, the prospect for further fiscal deficit pressure remains should oil spike higher. Nevertheless, the recent brutal sell-off has afforded us the opportunity to scale back our futures position and buy quality names such as L&T (infrastructure) and LIC Housing Finance at attractive levels.
Outlook
Our outlook for both markets for this year remains bullish, particularly for China given the points above. In contrast to America and much of the developed world, which remains in ultra-expansionary mode, China has effectively been in 'tightening mode' (a gradual process of bringing indicators, fixed asset investment, loan growth, M2 back to pre-stimulus levels) for some time and we believe that the end of this cycle is fast approaching, if it hasn't already. The Shanghai index remains over 100% from its all time high (October 2007), and is trading at less than 13x forward earnings with expectations of 12-13% EPS growth for this year. Banking and property stocks are trading at trough valuations relative to history and emerging market peers. We feel risk-reward is very attractive here and investors with a long-term view and willing and able to take a moderate degree of risk in their portfolio should be considering exposure at these levels. This should not in any way detract from the India story, which we still regard as the world's most exciting on a long-term basis. Whilst we have been structurally underweight the market for some time, the recent market correction has resulted in some attractive buying opportunities within selective sectors and we have introduced selective quality names. Given the likelihood of further upside oil and commodity complex prices and the implications for inflation and input prices, we are content to be patient in the short-term
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Ashburton Global Chindia Fund Comment - Dec 10
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Thursday, 24 February 2011
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Fund Manager Comment
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Review
The final month of 2010 summed up the year perfectly in terms of the challenging conditions and high degree of volatility that investors have become accustomed to, as markets headed south into mid-month before staging a recovery. We are pleased to report that our prediction at the beginning of the year - namely equities were our preferred asset class, and that our respective markets (Greater China and India) would post reasonable returns despite the fragile global economic backdrop - has for the most part panned out, although admittedly they have not been quite as fruitful as we had hoped. C'est la vie. More encouraging developments in the Western world began to take shape. President Obama agreed a 2 year extension of all Bush-era tax cuts, whilst American consumer sentiment advanced to the highest level in 6 months. Worries over a fractured euro-zone were alleviated after Germany's Finance Minister warned those betting against the euro that 'they will not succeed', and pledged to defend it. This combined with a growing acceptance of the view that global growth may well surprise on the upside in 2012, led to a shift in allocations from East to West, following Asia's outperformance since the March 2009 lows. China's November CPI print of +5.1% was in line with whispers but did little to aid sentiment. We have discussed the inflation story at length but the key point is that we see inflation peaking in the first few months of next year, as food prices correct from elevated levels caused by weather disruptions. The annual Central Economic Work Conference concluded with Beijing pledging to enhance and improve macroeconomic regulation to ensure stable and healthy development next year. As has become the norm, the focus will be on managing growth and inflation. India Inc managed to stage a recovery following the various corruption scandals that reared their ugly heads during November, although mid-cap names remain under pressure. Taiwan again registered solid outperformance versus the region on positive technology news-flow and as momentum builds about improved political developments with the mainland.
Activity
Whilst none of our India holdings were directly implicated by the 'loans for bribes' scandal, several were sold down heavily in sympathy. Most have since staged a decent share price recovery, though the process will take time. As such our exposure in terms of themes has remained unchanged on the month. We are also structurally cautious on the market at this juncture which will be discussed below. We are pleased to report that continued flows have afforded us the opportunity to add further exposure to our favoured themes. Industrial advancement has been bolstered with the addition of Greatview Aseptic Packaging (China's own Tetra Pak that is enjoying exceptional EM growth and with margins of c.30%) and Dongyue Group (the market leader of China's refrigerants and silicon that is looking to challenge Dupont). Consumer and Lifestyle has also been increased with the addition of Sparkle Roll, a luxury goods trader that sells Bentley, Rolls Royce and Lamborghini models, exclusive watches and premier wine to China's nouveau riche. This is a well managed company trading on cheap multiples, enjoying revenue growth of 100% that will also benefit from disposal of non-core assets. Profits were taken in Kunlun Energy following sharp outperformance.
Outlook
We see opportunities for our markets in 2011. In stark contrast to the picture in developed markets, many emerging economies have been tightening monetary and fiscal policy from the ultra-loose stance taken during the financial crisis. China and India have been leading the pack in this regard, but there is some concern that they may not have been aggressive enough, with fears that the inflation genie has once again been let out of the bottle - you could call it a mini-inflation scare. As we know, rising inflation in both China and India has huge political and social ramifications. In China we agree that interest rates (real rates remain negative) do need to rise but we disagree that inflation is out of control, and should peak in the coming months. The situation is worsening in India, with primary article inflation again looking to head north of 20%. With manufacturing already running at full capacity, a renewed move upwards in the oil and commodity complex will start pressurizing margins in a major way, and also bring back concerns over the fiscal deficit. The recent corruption scandals and upcoming state elections in the first half of this year also mean the window of opportunity for major reform is closing fast. Given that valuations in several sectors are already at elevated levels relative to their own history, and globally, the correction we are currently experiencing has the potential to continue, particularly in interest-rate sensitive stocks. Consequently, we remain structurally underweight the market but are buyers into any major weakness. We continue to like Taiwan as a 2011 regional outperformer and expect to add another position in the coming weeks. The technology news-flow on the back of multiple tablet launches, and from component makers in this area continues to be very positive, and global managers remain underweight.
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Ashburton Global Chindia Fund Comment - Sep 10
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Wednesday, 27 October 2010
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Fund Manager Comment
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Review
Often quoted investment phrases and historical indicators were once again consigned to the scrapheap as global equity markets continued their upward surge, despite the traditional 'September curse'. Commentators and analysts attempting to draw parallels with previous systemic crises are finding the going tough, with the current climate making road-mapping nigh on impossible. The pattern which has been prevalent for much of the year also continued through September, namely the underperformance of Greater China and the outperformance of India. There was nothing groundbreaking in Beijing's announcements, proposing stricter capital adequacy ratio's for the largest banks (at 15%, far beyond the requirements of Basel III) and further property measures in the way of lower LTV ratios and taxes, but the market reaction once again demonstrates that Chinese equities remain policy driven. Although not indicative of the country as a whole, prices in the major cities remain too buoyant for comfort, and one can expect further hawkish rhetoric from government channels, in an attempt to kill speculative demand, increase inventory and therefore depress prices. Time will tell. Meanwhile, India is in touching distance of its all time high, aided by enormous foreign capital flows that have now exceeded the frenzy that was late 2007. The RBI delivered its 5th 25 bps rate hike this year and also pushed the reserve repo up 50 bps. Nevertheless, there was a clear hint that the tightening cycle in general would not be severe given global uncertainties, and the fact that policy rates are now 'in neutral territory'.
Activity
Large cap outperfomance during the month resulted in us giving back a little of the good relative performance generated year -to-date, but such periods are to be expected given the investment climate and choppy market moves. Our core strategy in terms of the overall macro picture has changed little, principally because we still expect markets to finish the year higher, albeit with several corrections along the way. Fund activity was moderate, with selective profit-taking in some of the consumer names that have rallied very sharply over the past six months. The consumption story is well-flagged and understood, and valuations of the mainline names in the sector are now generally expensive, given that there is still too much money chasing too few stocks. We have focused our energies on identifying companies in the mid-cap space that are less formally covered, well-run, cash-rich and are undergoing a restructuring or rethink of strategy. I.T Ltd and Manappuram Finance are two such examples. Industrial advancement is another theme that will gain prominence within the portfolio over the coming years. The capital goods/industrials sector is currently undergoing a major re-rating after several years of underperformance. A handful of Chinese companies are emerging that are now able to compete on an international platform with global leaders. The speed at which these companies are moving up the value-added curve in terms of physical and intellectual capital is astonishing, and we feel that control systems, precision instruments and mining and engineering equipment are all hotspots that will enjoy strong growth. We have increased our exposure to the theme with the addition of ERA Holdings. Our long term bullish view on gold has been bolstered with the inclusion of Sino Prosper, a domestically focused Chinese producer with significant interests in Mongolia. The company expects to produce 80,000 tonnes by mid-2011 at a cash cost of less than $200 per ounce and is trading at a huge valuation discount to peers.
Outlook
Greater China is arguably cheap and unloved versus emerging markets, with India arguably expensive and a crowd favourite. Whilst worries over a policy error in China cannot be disregarded, we remain firmly entrenched in the 'soft landing' camp and feel that any stumble by the PRC is largely priced in. The stimulus package of 2008/9 has been stopped, simply because the economy is growing at a healthy clip, in-line with Beijing's comfort level of 8-9%. Further property measures remain a nearterm overhang, but housing as a percentage of GDP is marginal, and a lack of any significant leverage in the financial system means a price crash will not derail the economy. We have not been invested in Chinese property stocks for some time and we are happy to sit this one out on the sidelines until a satisfactory outcome has been achieved. The situation in India is almost the polar opposite. Domestic mutual Funds have been net sellers of significant dollar equivalents for several months now, yet the wall of money from foreign Funds has been unrelenting. We are also hearing that several big-name hedge Funds, who have missed most of this years rally, are finally pitching up to the party. Fashionably late? We doubt it. For us, valuations have for the most part run ahead of fundamentals, evidenced by several sectors trading at 1 or even 2 standard deviations above their 5 year average. However, it has rarely paid to bet against India Inc so whilst we are cautious short-term, we will maintain our exposure at c.45% and continue buying cheap put options to provide a degree of insurance. We also feel that there is a general lack of conviction from global investors regarding Taiwan, and we will be doing some work over the coming weeks to identify companies outside the technology majors, which fit into our long-term themes.
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Ashburton Global Chindia Fund Comment - Jun 10
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Tuesday, 7 September 2010
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Fund Manager Comment
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Review
Investors migrating to South Africa or Wimbledon may have been crying into their beer at watching their beloved team or favourite player exit the tournament early, but equity markets have awarded them ten out of ten for timing. June is historically a quiet and unrewarding month, and 2010 has proved to be no exception. Hopes of a rally into quarter-end were replaced by despondency as the price action went from bad to worse. Key technical levels around the globe have been broken, suggesting further downside pressure in the short-term. For China and India it has been business as usual, that is to say a general lack of response to domestic news-flow (be it macroeconomic data, a de-regulation of fuel prices in India, government rhetoric or policy measures) as global investors focus on events in the Western World. At the core of the problem lie two major issues; 1) is global growth sustainable beyond a 6 month time horizon? 2) if not, what can be done to stimulate it? Plenty of optimism has been placed in a corporate led capital expenditure cycle and M&A cycle given current high cash levels, but the worry is that if companies expect nominal growth to slow or even contract, they are much more likely to hoard this cash than spend it. Second, and perhaps more critically, is the lack of a co-ordinated policy response in Europe. Fiscal austerity has replaced stimulus at the top of administration checklists, and with the voting public now turning more hostile towards governments per se, promises of spending cuts and efficiency measures have been adopted to appease a growing crowd of taxpayers riled by the continued misallocation of their resources.
Activity
Our asset allocation and equity beta positioning within the portfolio aptly reflects our investment case for both markets at this juncture. That China has performed almost as poorly as Greece year-to-date is mind-boggling given the dichotomy between the two economies and the fiscal and monetary capabilities of both leaderships. The relentless nature of the sell-off now has China approaching trough valuations and two decade lows vs. MSCI emerging markets. This coupled with the ability of government to turn the taps on again should the international economic landscape deteriorate rapidly over the coming months gives us a certain degree of comfort. Insider buying has also picked up dramatically over the past fortnight. China will not act unless absolutely necessary but act it will. Within the Fund we have selectively increased our exposure to financials through banking and insurance stocks and we are keenly watching A-share related companies with a view to adding aggressively at lower levels. India's resilience remains extraordinary but for us the market has digested plenty of good news in the short-term. The 3G bonanza, a continued correction in the oil and commodity complex, successful government stake sales and improving tax revenues have all helped swell government coffers and alleviate the fiscal deficit. Nevertheless, we see very little in the way of attractive bottom-up stories at current prices. Profits have been taken in mid-cap names where valuations have run ahead of fundamentals, and we have also introduced a Nifty index short to protect capital.
Outlook
So where to from here? Given the scale of technical breakdowns we have seen across markets, a swift resumption of the extended rally from the March 2009 lows is unlikely. Price action in the bond market, gold, currencies and corporate spreads suggest Mr Market is not a happy camper. He despises uncertainty and the simple fact is that at this point there is simply too much of it - risk-reward for many is unfavourable, hence anaemic volumes as many sit out and watch the action from the sidelines. PIMCO have likened the current situation to 'driving without a spare', but for us it feels like a slow puncture, particularly where Greater China is concerned. Nevertheless, the key point is that Beijing has the toolkit to fix it and the economic roadmap is heading in the right direction. The Chinese leadership are much more worried about overcooling than overheating but by the same token sustainable growth of 8% p.a. is much preferable to the rampant double-digit pace of recent years. This is what Beijing is attempting to engineer, first through bursting the stock market bubble, now by cooling property prices. We also take great encouragement from the long overdue signing of the economic agreement (ECFA) with Taiwan, and although incremental earnings for the Taiwan index as a whole will only rise by an estimated 2-5% this year, it is the gesture itself that is crucial. We can expect more positive developments on the capital links theme towards the latter half of this year/early next year as the incumbent KMT party looks to curry favour with voters heading into the 2012 leadership election. Should the situation in the Western world deteriorate further, the case for both markets becomes even more compelling. Whilst India remains arguably the world's best investment story on a multi-decade view, valuations at this juncture are not attractive. It has not paid to bet against India Inc, but capital flows aside, we see little in the way of catalysts to drive this market higher over the summer. The same cannot be said of China and indeed, a big buying opportunity is presenting itself. We are waiting patiently.
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