JPMorgan Asian Investment Trust (JAI) has announced its final results for the year ended 30 September 2018. During the year, JAI’s return on net assets was +7.3%, representing an outperformance of 2.9 percentage points over the benchmark, the MSCI AC Asia ex Japan Index, which returned +4.4% in sterling terms. The chairman, Bronwyn Curtis, says that this represents the fourth year in succession in which JAI’s NAV has beaten the benchmark index. The return to shareholders was +2.9%, reflecting the effect of a widening of the discount over the year from 8.0% to 12.1%. The vast majority of the NAV outperformance in the year was attributable to stock selection with notable contributions from holdings in China and Korea.
Manager’s commentary on macroeconomic backdrop
“The year to 30th September 2018 was dominated by multiple geopolitical factors that unsettled global stock markets and gave rise to heightened macro-economic uncertainty, a slowdown in economic momentum and volatility. Despite the relative resilience of the economies that make up the region, Asia was not immune to these issues. Notably, however, with good stock selection it was still possible to achieve positive investment returns from the region over the year.
Against a demanding and unpredictable investment backdrop, we are pleased to have outperformed the Company’s benchmark index: during the year under review, the Company’s return on net assets was +7.3%, outperforming the MSCI AC Asia ex Japan Index, which delivered a +4.4% return in sterling terms. This is the fourth consecutive year in which we have outperformed Asian stock markets (as measured by the benchmark index), an achievement that stems primarily from our stock picking.”
Manager’s commentary on regional performance
China
“China underperformed the region over the year, finishing the review period flat. Beijing policy reforms endeavoured to minimise the impact of external challenges as well as the risks of higher inflation and slower global growth, with measures focused on domestic demand and a consumer-led recovery.
Despite flat performance from Chinese equities overall, we achieved positive relative performance from a wide range of sectors, driven primarily by stock selection. Four of the five best performing stocks in the portfolio were Chinese stocks. Sino Biopharmaceutical, a leading drug manufacturer, was a notable performer on the back of a positive pipeline outlook. We sold the company in the summer to take profits, which proved to be a well-timed decision. The healthcare sector subsequently suffered following the announcement of plans for a centralised pharmaceutical procurement policy and the possibility of greater industry regulation; both factors raised fears of potential downward pricing pressures. This also affected biopharmaceuticals manufacturer, 3SBio which we continue to hold, and which made a negative contribution to performance.
Relative to our benchmark index, we have an overweight holding in Shenzhou International, a high-quality textile manufacturer, with strong and visible earnings growth momentum and a competitive edge in both pricing and delivery lead time. It was one of the very best performers for us over the year. Our holding in China’s largest insurer Ping An Insurance was another top contributor, as it continued to deliver solid earnings, while CNOOC, an upstream energy company, benefitted from the strong oil price.
Chinese internet giants Alibaba and Tencent remain top ten holdings in the portfolio, but their market values fell over the year, following sharp corrections amidst a well-documented tech downturn. Our positive view on the long-term prospects for both stocks remains intact. “
Korea
“The Korean market performed in line with the region overall, but our stock selection delivered some of the portfolio’s best returns over the year. Daewoo Shipbuilding benefitted from improving sentiment on the back of new tanker orders while new-build prices started to rebound. Samsung Engineering also rose following a new order announcement from an existing Middle East client.”
Taiwan
“In North Asia, Taiwanese equities outperformed. The market was supported by relatively high dividend yields and the resilience of the New Taiwan Dollar. These factors were enough to overcome the poor performance from the technology and machinery stocks that comprise much of the local equity market. Taiwan Semiconductor Manufacturing is the largest holding in our portfolio and the world’s largest semiconductor foundry. In spite of sector headwinds, it performed well over the year and made a positive contribution to performance. On the contrary, our positions in GlobalWafers and Largan Precision detracted from performance. GlobalWafers, fell on concerns of rising supply combined with a softer demand outlook, while Largan Precision, which supplies camera lens modules, fell on weak iPhone XS sales momentum. GlobalWafers was sold before the year end. “
India
“The Indian market had been one of the more robust Asian markets over the year until a sharp correction occurred in September, resulting in a flat year overall. The correction was triggered by more negative news flow from India’s financial sector with IL&FS (a large unlisted infrastructure finance company) defaulting on some of its obligations. The sector had earlier been hit by February’s revelation of a fraud involving Punjab National Bank (PNB), amongst the largest state-owned banks in India.
Our stock selection in India was disappointing. Our holding in Maruti Suzuki, which sells 50% of cars sold in India disappointed, following a slowdown in sales towards the end of the period. Not owning two top performers Reliance Industries and Infosys was painful. Although its core businesses are in the energy industry, Reliance Industries’ success was driven by its telecoms arm JIO which gained market share above expectations. We should note that our reason for avoiding Reliance is based on concerns about its governance. Meanwhile, information technology stock Infosys benefited from the weaker rupee as information technology is one of India’s few export-driven sectors. “
Other markets
“Looking at other markets where we invest, Thailand was the top performing market over the year, boosted by optimism ahead of the election early next year and the resilience of the Thai baht, reflecting its strong current account position. Malaysia also fared better, despite the shock election victory of the opposition coalition party led by 92-year-old Mahathir Mohamad. Both markets benefitted from a stronger oil price.
We are modestly overweight in Indonesia and believe valuations and economic momentum remain relatively favourable. However, it underperformed over the year, as did the Philippines, with rising inflation a concern as well as worries that the central bank could be sluggish in raising interest rates. Both markets suffered on the back of local currency depreciation (reflecting their current account deficits), as well as weak corporate results, particularly from the banking sector.
Performance was buoyed by the Company’s off-benchmark position in Vietnam, achieved through investing into a JP Morgan Vietnam unit trust.”
Manager’s commentary on outlook
“In the near term, the direction of travel for Asian markets is uncertain and political risk will continue to feature. We are more cautious than we were a year ago and we acknowledge that the period immediately ahead could be a bumpy one. But we are patient and discerning investors, confident that the long-term story for Asian equities remains robust.
While expectations of improved growth have shifted towards the US of late, we see the beginning of a cyclical recovery in selected Asian countries and we have begun to see signs of revival in Indonesia, where we are overweight. In India there are also positive signs, but we are maintaining an underweight position as valuations still look rich, and the risk of further shocks and negative news flow from the financial sector continues. Should markets fall further, we will be in a good position to add to holdings at more attractive levels.
Short-term, the status of trade relationships between China and the US is unsettling. Concerns linger about potentially stagnant consumer spending, even though the Chinese government’s attempt to offset deleveraging and trade concerns through targeted stimulus should stimulate consumption growth. We would expect this growth to feed through to improvements in Asia inter-regional trade.
Across the region, domestic consumption is contributing much more to economic growth than it was 15 to 20 years ago; without understating the importance of Asian exports, the ability of the region’s economies to withstand prolonged trade tensions resulting from protectionist US policy may be stronger than feared.
We will continue seeking to generate capital growth, as well as a predictable quarterly income. We believe there will always be opportunities to buy quality companies at reasonable prices and that we gain a considerable advantage from having people ‘on the ground’ across the region. Achieving our aims depends on choosing the right stocks and our local presence (and active engagement with investee companies plus those we have highlighted for future consideration) facilitates this. We are confident that the long-term case for Asian equities remains robust and that our proven stock picking ability will continue delivering shareholder value, as it has done over time.”