New Capital Asia Future Leaders Fund

Date:: 30 April 2025

Marketing Communication

Executive Summary

Key events in market

India outperformed the index again in April, along with the Philippines as two of the most domestic orientated economies with less exposure to US exports during such tariff volatility. Despite the index having a small positive throughout April, sector performance suggested a more defensive approach with Consumer Staples and Utilities being the best performers vs. higher beta areas of Consumer Discretionary and Materials underperforming as investor concerns on the impact from tariffs arose.

Key performance & positioning updates

The Fund was down relative to the benchmark in April by 78bp and flat in absolute terms. Sector allocation was notably negative from the Fund's underweight in Consumer Staples sectors and overweight in Consumer Discretionary. Country allocation was a small negative from our underweight in Thailand and off benchmark Vietnam.

Market Update

April was a rollercoaster for financial markets, triggered by President Trump’s tariff announcements on what he dubbed Liberation Day on 2 April. The irony is that looking at the monthly performance of the MSCI All Country World Equity Index, which rose by 1% in April, one might conclude that it was a relatively quiet month. Instead, the tariff announcement on 2 April was followed by a decline of more than 11% that was only halted by the announcement of a 90-day pause on most US tariffs. Subsequently, further backtracking by Trump on tariffs on certain sectors, such as technology and automotives, and the impression that, at the end of negotiations, US tariffs will not be much higher than before Liberation Day have helped the global stock markets gradually recover.

However, the events of the past few weeks will have lasting consequences on markets and geopolitical balances. In particular, the role of the dollar as a global reserve currency is being seriously questioned due to the unpredictability of the US administration’s actions and the difficulty in understanding what its strategy is. The decline in the dollar’s trade-weighted exchange rate of more than 4% during the month, which brought the year-to-date decline to over 8%, is perhaps the start of a trend.

One consequence of the US dollar’s decline is that while the local currency performance of stock indices of major developed economies has been similar, the US market has significantly underperformed its peers when measured in the same unit of account. Furthermore, emerging markets have risen more than developed ones, confirming a stylized historical fact that they benefit from the weakness of the US dollar.

Fund Performance & Positioning

The best performing stock was the recently added Dixon Technologies, who are the leading smartphone assembler in India. Small caps that had sold off aggressively year-to-date managed some recovery in April as the India market as a whole performed strong and retail flows remained resilient that typically feed into smaller cap stocks. Foreign flows have turned positive in recent weeks, supported by the narrative that India is best placed not just in Asia but potentially globally and this reflected the fact it was the first major stock market to recover losses from 'Liberation Day'. Not only does India have low export percentage to GDP but it is also a beneficiary of lower oil prices and plays an important role for the US in their hedge vs. China. Such importance to the US is why JD Vance visited India and why they have made India the number one priority for announced trade deals. This gives India notable bargaining power. With lower tariffs than China and Vietnam, India is also well placed relatively to gain further supply chain shifts as evidenced by Apple announcing their 100% shift of US iPhone production to India. Dixon themselves have announced additional contract wins in smartphone and laptop businesses in recent months. Dixon is an example of the many exciting and high quality structural stories you can find in the mid and small cap space in India. We shifted to overweight India 3% post the tariffs to reflect this top down (and bottom up) attraction trimming a little from Hong Kong that had performed strongly YTD. We also trimmed tariff sensitive areas such as Vietnam that is worst positioned after China. The worst performing stock was JD.com. The ecommerce business had held up well over the past two quarters as they have high exposure to consumer electronics that have benefitted from government trade in subsidies. However they want to use their 1P logistical network to enter food delivery, which is currently dominated by Meituan with over 70% market share. Naturally entering this involves high investment particularly on consumer and restaurant incentives not taken lightly by investors of either company. Initial signs suggest JD's promotions are having some success with Meituan not entirely responding as of yet with their own discounts. Ultimately we view this as negative for both businesses and so we have trimmed both to neutral weights until we get a better sense of rationalisation which is a key driver for these type of stocks.

Outlook

Whilst the Hang Seng is down since tariffs were announced, given such magnitude of tariff rates, it may come as a surprise that the market is not down more. HK/China is coming from a starting base of low valuation and expectations (absolute, relative to history and relative to MSCI World/US), lower foreign ownership after years of foreign selling and most importantly a stabilization of economic and bottom up growth supported by government policy. Furthermore, innovation ability has been rightly highlighted through China’s DeepSeek artificial intelligence (AI) models, Xiaomi's 'dark factory' automation and superior electric vehicle (EV) technology. Whilst in Taiwan and Korea over the past weeks, memory players like Hynix and Nanya were telling me how taken back they were in the advancement China memory players have made in the past three years especially, closing the technology gap to leading players from 4 years to 2 years in that period.

Shifting exports to record highs post the first trade war and producing DeepSeek whilst under high end AI chip embargos is further evidence that China does their best work under the radar when their backs are against the wall and written off. China has been shifting high tech GDP contribution from 11% to 15% in the past four years whilst reducing property from 19% to 16% in that time with lending to such sectors reflecting that. One of the reasons GDP downgrades are less than the 3% worst case GDP hit from zero US exports is because a) the high dependency of US on China imports evidenced by Trump reversing electronic goods and auto parts and b) the expectation of strong policy response by the China authorities. China has a lot of room fiscally and monetarily (with inflation 0%) vs. the US to support the consumer and property further. That is not to say China will not suffer, already evidenced in April's manufacturing Purchasing Managers' Index falling below 50 under expectations and new export orders at the lowest in two years, but with a base case of tariff rates coming down (as it seems Trump is willing to do) and a firm policy support domestically, the impact could be manageable. China's hard stance versus the US has reminded global investors of the strength they have built up over the past decade through leading in global trade, manufacturing with world class infrastructure (spending 10x US % GDP on transport) now combined with ever improving innovation and technology. In a world where the US is looking less attractive to global investors, suddenly China's investment case is being re-looked at once again. History suggest that a weaker US dollar could be a tailwind for EM Asia as a whole.

Disclaimer

MARKETING COMMUNICATION

For professional clients, qualified investors and accredited investors only. The value of investments and the income derived from them can fall as well as rise, your capital is at risk. Note: Past performance is not a guide to the future. Returns may increase or decrease as a result of currency fluctuations.

All sources: EFG Asset Management (UK) Limited ("EFGAM"), Factset, Bloomberg, Morningstar as at end of the month. Any other sources as applicable.

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