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Witan Pacific benefits from sterling weakness and Asian market performance

Witan Pacific has announced its interim results for the six months ended 31 July 2016. During the period, the trust provided an NAV total return of 22.8% and a share price total return of 19.5% (the discount widened from 10.9% to 13.4% during the period although the trust’s chairman, Sarah Bates, says that there was volatility in the discounts of many of the trusts investing in the Asian region over the period). These compare against a total return for its MSCI All Country Asia Pacific Index benchmark of 22.0%. The trust generated a revenue of 3.01p per share (an increase of 6.0% year-on-year) and paid an interim dividend of 2.2p (an increase of 2.3% year-on-year).

Looking at the trusts performance in more detail, the trust’s chairman says that, in January and February, the region’s stock markets were suffering from considerable uncertainty arising from fears of a very sharp slow down in the Chinese economy. From a low point in mid-February, most of the markets in the region (except for Japan’s) recovered somewhat over the next few months, and that recovery has continued into the current half year so far. She says that the recovery saw particularly strong performances from the Philippine, Thai and Hong Kong markets, and from commodity and telecoms stocks in sector terms. However, in local currency terms, the Japanese market fell by 7%.

Looking at the trust’s performance in sterling terms, the chairman says that currency effects were unusually significant given the sharp decline in sterling following the results of the UK referendum on membership of the European Union, and given local currency strength as well. The yen rose by some 25%, transforming a negative return to local investors in the Japanese market into a 17% return to a sterling investor. She says that, in aggregate, currency provided considerably more than half the returns from the region as a whole, but some of the individual markets, such as the Philippines and Thailand, provided returns to local investors of over 20%, and recovery in sentiment towards China resulted in returns of around 13% to local investors in China and just under 18% to investors in Hong Kong.

Looking at the underlying portfolios, the chairman says that Aberdeen and Matthews both focus on stocks rather than on currencies or macro-economics and therefore can find themselves at variance with markets driven by big-picture influences in the short term. She says that there was some evidence of this as the portfolio underperformed in the market recoveries of March and July. However, overall, Aberdeen outperformed strongly over the first six months of the financial year, following a prolonged period of underperformance. She says that Aberdeen’s portfolio provided a return (before fees) of some 27%, compared with the benchmark’s 22%. Mining shares (including Rio Tinto and BHP Billiton) which are owned by Aberdeen rallied after a long period of poor performance. Elsewhere, OCBC, Keyence, Shin-Etsu Chemical and Singapore Technical Engineering also made a notable contribution to Aberdeen’s performance. The chairman says that Matthews portfolio performed more or less in line over the six month period, having performed very well in relative terms in 2015/16. However, Gavekal underperformed in relative terms, having outperformed in 2015/16’s falling markets.

In terms of outlook, the chairman says that markets across the world have been strong in so far in 2016. This is perhaps surprising in the face of lacklustre economic growth, weak corporate earnings and political uncertainties ranging from the UK’s “Brexit” referendum to the forthcoming US Presidential election. For UK investors, the weakness of sterling has flattered results to some extent, but there has been more enthusiasm for the Asian region than for a while. In her view, Asian markets had been under some pressure for several years before 2016 and, whilst uncertainties remain over the Chinese economy’s transition to a slower growth rate, regional valuations appear to have reached a point where investors were willing to look for glimmers of hope rather than already discounted faults. However, she says that, Japan, in contrast, has been weak in local terms with the strong yen a double-edged sword – weighing on profit forecasts while boosting returns for foreign investors.

The chairman says that, part of the reason for such startling equity returns relates to the global decline in both short and long-term interest rates, which has made the relative valuations of equities look more attractive by comparison. However, she says that, at some stage, the decline in yields, which has reached extreme levels, will start to reverse and those investments borne aloft by abundant liquidity rather than their own intrinsic merits may prove vulnerable.

Witan Pacific benefits from sterling weakness and Asian market performance : WPC

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