China’s reopening and its prospective impact on Asia has not met investors’ expectations so far.
Year-to-date, the average trust in the IT Asia Pacific sector fell by 1.5%, which may come as a disappointment considering the hopes that China’s recovery story aroused.
Pruksa Iamthongthong, senior investment director at Asia Dragon Trust, said: “Domestic consumption recovery in China in the first quarter of the year fell short of the market’s unrealistic expectations.
“We were of the view that any recovery would be more towards the second half and are encouraged that conversations with businesses indicate that spending is starting to pick up.”
Iamthongthong added that a key question is whether the Chinese central government will step in with targeted stimulus measures if mainland China’s economy continues to weaken.
Past measures have included specific support for the property sector and increased liquidity in the financial system via policy rate cuts and emphasis on loans to specific segment.
She said: “We think the central government will continue to keep a close watch on the macro data over the next few months and calibrate its response from there.”
Performance of trust vs sector and benchmark YTD
Source: FE Analytics
Year-to-date, Asia Dragon Trust has underperformed both its sector and benchmark. In addition to the negative macroeconomic background, the trust’s consumer discretionary stocks as well as its software positioning have been detrimental to the performance.
Iamthongthong said: “Specifically, China Tourism Group’s share price was hampered by concerns over outbound travel affecting domestic duty free demand.
“We believe the company is still best positioned to benefit from airport duty-free recovery and the government’s plans to develop the downtown duty-free industry.”
She also highlighted two holdings in the software space, Glodon and Yonyou, which both reported 15% growth in revenue earned through core business operations.
The first firm, however, missed expectations due to a halt in construction new starts, but the trust’s management team is still confident that the company will deliver for the full year.
Yonyou’s share price was weighed by concerns over competition from Huawei that is reportedly looking to enter the ERP market in China.
Iamthongthong said: “We remain comfortable with Yonyou’s leading position and the company should continue to benefit from more SOE signings and opportunities arising from tech innovations.”
At a macro level, the team managing the Asia Dragon Trust forecasted that the factors driving Asia’s recovery will pick up in the second half of 2023 or early 2024.
That includes, for instance, the broadening domestic recovery in China. While domestic demand has been recovering across the rest of Asia, China’s recovery is expected to support trade, tourism and exports across the region.
Another factor is the bottoming to the overall technology cycle.
Iamthongthong said: “The broader technology industry has gone through a period of inventory correction amidst a weak demand environment.
“We expect this inventory correction to end in the second half of 2023 and expect a gradual recovery from there through to 2024.”
Overall, the managing team remains confident that China’s economic recovery is yet to gain momentum and that all conditions are supportive of a sustained recovery.
As a result, the trust has increased its allocation to China, with a particular focus on businesses that it deems to be key beneficiaries of the reopening of the Chinese economy. However, the trust also focuses on six long-term themes: aspiration, building Asia, digital future, going green, health & wellness and tech enablers.
A recent addition is Aier Eye Hospital, a Chinese private eyecare hospital chain. “Demand is supported by the ageing population, rising living standards, and government policies to improve the accessibility and standards of drugs and healthcare,” Iamthongthong explained.
Asia Dragon Trust has also increased its allocations in three other Chinese businesses: Tencent, Alibaba and Autohome.
Conversely, the trust has taken money off financials, especially south-east Asian banks, due to the environment of peaking interest rates and on valuation grounds. That includes, for instance, Techcom Bank (Vietnam), Bank Central Asia (Indonesia) and DBS Bank (Singapore).
Iamthongthong added: “We have also taken the opportunity to raise the earnings visibility of the portfolio and we have reduced exposure to names which have lower earnings visibility on a relative basis, given the broader macro backdrop.”
The trust has also reduced its exposure to Indian businesses Delhivery and Nykaa.