FOR PROFESSIONAL AND INSTITUTIONAL INVESTORS USE ONLY PLEASE READ IMPORTANT DISCLOSURES INVESTMENT COMMENTARY Q1 2018 Asian Growth Leaders Fund A s u b - f u n d o f B l a c k R o c k G l o b a l F u n d s Fund Manager(s): Andrew Swan Emily Dong Capital at risk. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. Past Performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Performance The Fund fell by 1.4% over the quarter, underperforming its benchmark, which was up by 0.7%. The first quarter of 2018 saw volatility return to equity markets. While January was very strong, with indices and flows hitting recent highs, February was marked by a sharp correction and a rise in volatility, triggered by a systematic correction in the US, the surge in US 10-year bond yields and rising expectations of Federal Reserve (Fed) tightening. March saw the sell-off sustained and general risk-off sentiment gather momentum, fuelled by trade war concerns and the first Fed rate hike. Asian markets returned +0.7% over the quarter, led by Taiwan (+8.8%), as hardware technology particularly semiconductors continued to surprise from the demand side and drove market performance. Chinese markets ended the quarter with a small positive but were volatile throughout, and finished under pressure on the back of the trade tensions with the US. Southeast Asian markets were mixed, with Thailand (+8.3%) performing strongly, helped by a normalising domestic and export environment pushing current account and currency improvements. On the other hand, Indonesian equities were down 7.1%, as domestic activity remains stubbornly weak. The Philippines (-12%) was the weakest market in Asia, as the central bank is keeping rates unchanged despite inflation continuing to expand, hitting 4.5% well above the target and putting pressure on the currency and the balance of payment. South Korea was flat over the quarter but outperformed in March on the improving geopolitical climate with North Korea. India (-7.1%) was weak over the quarter, impacted by the Capital Gains Tax introduced in the FY2019 budget, concerns over rising inflation, non-performing-loan issues in the banking sector and a disappointing earnings season. Over the quarter, stock selection in China detracted from performance, while stock selection in Korea helped to offset some of the losses. At the stock level, the main detractor this quarter was Chinese gaming company NetEase. It retreated on concerns around potential competition from Tencent s survival game launch, and as monetisation of NetEase s survival games were slower than expected. We think this is temporary and have instead used this recent share-price pullback as an opportunity to add to our position. NetEase continues to trade at a discount to global peers, and we think the market still underappreciates NetEase s research and development (R&D) capabilities. As it s one of the gaming companies with the best R&D capabilities, we are optimistic that this will translate into a higher probability of launching hit games. Our overweight to New China Life Insurance also detracted from performance, as the stock sold off on failure to meet the street s expectations of sales and profit. On the other hand, stock selection in Korea helped to offset some of the losses. In particular, Samsung Engineering in Korea saw strong performance on the back of president Moon s visit to the United Arab Emirates (UAE) in March. His visit lifted market expectations on potential
new orders to come from the UAE in refining/chemical plants. Mediatek in Taiwan also helped to offset some of the losses, as it continues to see margin recovery from gaining market share in China s mid-to-low-end smartphone market. Portfolio Activity After not owning anything in Malaysia for the past year, we initiated a position in Malaysia Airports, as we see long-term growth in Malaysia tourism, upside from the monetisation of its stake in Turkish airports, and as valuations remain attractive relative to regional airports. We also purchased Cognizant Technology Solutions, a professional services company in India, as the company continues to gain market share. The company is also likely to benefit from US tax cuts and deregulation, given that the majority of its client base is in the US. Lastly, post involvement by activist fund Elliott Management, the company has strengthened its capital management. On the other hand, we locked in profits and significantly reduced our Chinese financials exposure post recent strength by trimming China Construction Bank. We also reduced our position to the Chinese insurance sector, as it has quickly become a consensus long (trimming China Pacific Insurance and exiting New China Life Insurance). We locked in gains and exited Aluminum Corporation of China (Chalco), as well, given recent aluminium price strength. Moreover, we think supply-side reform will be weaker in aluminium versus other overcapacity industries. Outlook & Positioning We continue to be positive on Asian fundamentals. Company revenues are expanding, fuelled by improving global activity. Key reforms are starting to bear fruit in multiple countries. Costs are increasing at the margin but remain under control, and pricing power has come back to Asian corporates, meaning margins are also expanding, helping to improve profitability. Valuations have now passed mid-cycle but remain supportive. The stabilisation of China growth and the supply-side reforms implemented there should not be underestimated for their impact on lifting the whole region. We are, however, also cognisant that risks from outside Asia are on the rise and will further increase market volatility. In particular, the increasing trade tensions between the US and China have the potential of disrupting the trend of expanding global growth. While there has been no economic impact to date, the situation is inflecting market confidence, and tensions could accelerate from here. The direction of the US dollar, which we still expect to remain weak, and how the US Fed reacts to improving fundamentals are other trends to watch for. We still believe that global reflation shall emerge as the core theme for 2018, particularly as we see a continued synchronised global recovery emerging markets and Asia remain the best proxy to global growth. Asian markets do not yet reflect the improving fundamentals. We expect value and cyclical factors to outperform in this environment and are positioned accordingly. We see the valuation excesses that have built up in some sectors technology, in particular starting to normalise from here. Flows should also be playing a key role for the asset class over the next few months, given that investor positioning in Asian equities remains light. While the recent uptick in volatility is a warning of a growing complacency from global markets, so long as growth remains robust, we see plenty of opportunities in the asset class, especially as volatility will accelerate sector rotation. In terms of Fund positioning, we are overweight in China on the continued strong macro recovery coupled with better supply-side discipline, and in India, as we see a shift in government focus from reform to growth. We are most underweight Taiwan and have no exposure to Singapore, as we see limited stock opportunities there.
Key Risks Exchange Rate Risk Overseas investment will be affected by movements in currency exchange rates. Specific Sector The fund invests in a limited number of market sectors. Compared to investments which spread investment risk through investing in a variety of sectors, share price movements may have a greater effect on the overall value of this fund. Emerging market risk Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore the value of these investments may be unpredictable and subject to greater variation. Smaller company investments Smaller company investments are often associated with greater investment risk than those of larger company shares.
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