New Capital Asia Future Leaders Fund

31 August 2024

Marketing Communication

Executive Summary

Key events in market

The ASEAN region performed well as USD weakness benefitted those countries the most. Philippines was one of the first countries to cut rates and as a result was the best performing market. China onshore market was the worst performer, notably underperforming Hong Kong as macro data worsened and the property sector showed no further signs of improvement. Healthcare and Property were strongest at the expense of Materials and Utilities.

Key performance & positioning updates

The Fund was up 1.46% in the month of August, 48bp behind the benchmark (MSCI AC Asia ex Japan Net Total Return USD Index). Country allocation was relatively flat as having no exposure in high performing Malaysia and Thailand was offset by our off benchmark Vietnam, overweight in Philippines and Indonesia that also did well. Sector allocation was also neutral as our underweight in underperforming Materials was offset by our underweight in Healthcare.

Market Update

The global equity market rally continued in August, the MSCI World All Countries (MXWD) Total return was up +2.6% for August, bringing year-to-date at +16.3%. However, as opposed to the relatively smooth increases of previous months, the first trading days of August saw a surge in volatility due to increased fears of an imminent US recession and investors’ adjustment to the further normalisation in Japanese monetary policy. The selloff was eventually short-lived, but should be seen as a warning of how markets would react to new shocks.

The sudden increase in market volatility and the persistent geopolitical tensions compounded with expectations of imminent monetary policy easing and supported the extension of the gold price rally.

The increased evidence that inflation is returning to target leaves ample room to for monetary policy to respond to downside risks to the economy, as highlighted by the Fed Chairman Jerome Powell in Jackson Hole. However, other central banks, including the European Central Bank (ECB) and the Bank of England, have so far warned of the risk of loosening policy too quickly. This was reflected in a more pronounced decrease in government bond yields in the US than in Europe, which triggered a broad-based depreciation of the US dollar.

However, investors’ concern over the risk of recession looks overdone, at least in the short-term. With more than 200 basis points of easing by the Fed priced in by the end of 2025, the scope for long-date bond yields to fall much from the current levels is limited.

Fund Performance & Positioning

Lemon tree, the Indian hotel chain was the worst performer in the month after announcing weak guidance on margins for the next few quarters. Whilst the overall hotel industry has been in an uptrend the past 2 years, with improving occupancy and room rates, Lemon tree has disappointed vs. peers on margins, largely as management keep investing in renovation costs for existing brands, with little sign of return on such investment through room rate growth. We decided to sell the stock as we concluded the management team's execution has been poor and their guidance cannot be relied.

Ayala Land was our best performing stock, a recent addition to the portfolio. As mentioned, Philippines cut rates for the first time in years in August as their central bank become more comfortable with US rates falling in the future that allows them less need to keep higher rates to protect their currency. Ayala Land is the leading property developer and thus is typically positively correlated to lower rates. The stock was trading at historic low valuations and inventory is around 22 months, notably higher than the historic norm of 12 months. We see lower rates improving demand that can lead to lower inventory and higher presales. Regardless, Ayala Land has fundamentally outperformed peers in presales recently as they are more exposed to the more resilient luxury segment vs. peers focused on more vulnerable mass market.

We added Korea manufacturer Hyundai Electric during the month as it sold down in the tech sell off and de-rated from 27x PE to 17x offering an attractive entry point for a stock we have liked for a while. They are a pure play high voltage transformer manufacturer, #1 globally. This has historically been a low growth, highly cyclical industry with high capital investment required, meaning many large US and European firms exited the market many years ago, resulting in 3 Korean players dominating the global market. Demand for high voltage (HV) transformers in the US has significantly increased as renewable build outs accelerated and need to be connected to the grid. This has resulted in severe undersupply for the Korean players, reflected in all having backlogs until 2028 and therefore able to increase pricing the past 18 months. This is now leading to higher margins and returns on investment with high revenue visibility for the coming years. They are now seeing a similar demand pick up in Europe. As US and European Utilities do not want to buy from China, there has further led to a Korean monopoly in developed markets.

	New Capital Asia Future Leaders Fund	MSCI Asia ex Japan TR Net	Difference
1 Month	+1.46%	+1.95%	-0.49%
3 Month	+3.22%	+6.15%	-2.93%
6 Month	+8.76%	+11.92%	-3.16%
YTD	+9.36%	+11.74%	-2.38%
1Yr	+9.87%	+15.73%	-5.86%
3Yr Annualized	-8.45%	-3.44%	-5.01%
5Yr Annualized	+7.41%	+5.19%	+2.22%
Since inception annualized	+9.4%	+5.23%	+4.17%
Since inception 19.12.2018	+66.8%	+33.69%	+33.11%

Past performance is not necessarily a guide to the future. The value of your investments and the income from them may fall as well as rise as a result of market as well as currency fluctuations and you may not get back the full amount invested. Fund performance is net of fees and representative of the USD I Acc Share Class and shows a maximum of five previous calendar years and current year to date (computed on a NAV to NAV basis). Where share class inception begins prior to the five previous years the chart has been rebased to 100. Where the Fund has fewer than five full years of performance, returns are shown from the inception date. Source: EFG Asset Management, Bloomberg. As at 31 Aug 2024.

Outlook

Incremental data out of China is skewed to the downside. New home sales were down 28% yoy, worse than July 20%. Recent policy announcements regarding inventory reductions using state funds has shown limited implementation, with apparently just 5% of allocated funds being used thus far. Part of the reason is the inability for authorities to agree acceptable prices with developers. Mortgages fell to the lowest issuance level since Sept. 2021. Pricing continues to fall at a stable pace vs. prior months. The government announced further property and consumer support through allowing all homeowners to refinance mortgages are current rates until January. The expectation is this will have limited impact however given mortgage rates have been low for a while now.

Official manufacturing Purchasing Managers Index (PMI) disappointed again, below expansion levels, although the unofficial Caixin index did rebound above 50, continuing the difference seen YTD explained by export demand being stronger than domestic. One of the reasons why the China market has not fallen more in the past year is the strong outperformance of high dividend stocks, often large caps such as Energy and Financials. This is because China yields have consistently fallen to such low levels in the past years as well as a defensive preference with a weak economy. There has been increasing talk of authorities intervening in the bond market to stop yields falling further in part to limit the threat to the currency. This could lead to a slow down in high yielding stocks performance but for other stocks to outperform, we also need to see the underlying trends to improve. Currently this is not happening, with most consumer companies ex auto reporting further weakening trends in the past earning season. With overall trends in property and consumer not getting better and with policy increasingly ineffective, we have reduce our Hong Kong/China weight a little to small underweight.

We have, and will continue to re-allocate to, the ASEAN region which has lagged and has a macro catalyst in weaker USD with much more attractive valuations ex China. These economies have more room to cut rates and thus support economic trends given they had to raise rates more to protect their currency during period of strong USD. We still like Korea through a wide array of exports despite KRW weakness as we see high visibility in demand in shipbuilding, cosmetics and transformers. We have reduced our exposure in Memory through Hynix but remain overweight as pricing trends remain supportive driven by AI demand. In Taiwan we have rebalanced our portfolio between AI and non AI, notably through smartphone exposure as we believe the 2nd leg of AI will be in the application of smartphone AI that can lead to faster replacement cycle. We are relatively neutral in India, adding to more defensive areas in Staples and Healthcare and Insurance. This reflects what we see as a slowdown off a high base in more cyclical areas such as 4-wheel autos, banks and retailers. Industrials have also underperformed in the past quarter as the recent election delayed project starts leading to short term drops in volume growth for many companies. We expect this to recover in the coming months as part of a multi year thematic and keep our industrial exposure as it was.

Fund Manager

Chris Chan

Portfolio Manager
Hong Kong

Equity

Detail

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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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