Recent developments in China do not derail our ongoing thesis for the country. Growth is – and should be – slowing, but importantly it remains strong in any international context.
Domestic growth is likely to remain robust, and inefficient fixed asset investment should lead any slowdown.
While deceleration may lead to bouts of volatility, we still believe systemic risks are unlikely to emerge in China soon.
Although the necessary structural reforms are undoubtedly a significant challenge, they do not look overwhelming in the context of the changes necessary in large parts of the developed world.
We remain positioned to benefit from Asia’s growth, with a portfolio comprised of stocks with strong earnings growth that also provide a good dividend yield underpinned by free cash flow. We are still overweight Hong Kong and China, Thailand and Singapore, while cautious with respect to the Australian market, which we believe remains overpriced and vulnerable to a weakening domestic environment.
The second quarter of this year saw a slew of profit warnings in the Australian market concentrated in the domestic cyclicals and mining service sectors, as domestic economic data continue to weaken.
We retain our low exposure to India, and here, too, recent data support our negative bias. Real GDP growth for the first quarter of 2013 was 4.8 per cent year-on-year, after 4.7 per cent in the previous quarter.
It was the first time since 2003 there have been two consecutive quarters of less than 5 per cent GDP growth, showing the extent of the slowdown.
It is caused in part by sharp cuts in government spending in the second half of the fiscal year ending March 2013. This has led to a fiscal deficit forecast for 2013 of 4.9 per cent of GDP, better than previous estimates of 5.2 per cent and significantly lower than 5.8 per cent in 2012.
The government has also continued to raise diesel prices to tackle subsidies, and in June announced an almost doubling in gas prices, effective from April 2014, to encourage domestic production. We believe further meaningful reforms will only be undertaken after the next general election, which is due before May 2014, and expect growth to recover only slightly in the next few quarters.
We sold four holdings from the Liontrust Asia Income fund in the second quarter of the year and initiated eight new positions. New holdings include Bonjour, a Hong Kong-listed cosmetics retailer benefiting from rising sales to tourists from mainland China; Aurora, a Taiwanese office equipment distribution company which is expanding its network in China; and Silverlake, a provider of integrated banking solutions.
Elsewhere we added Overseas Union Enterprises, a Singapore property group specialising in hospitality assets; ANZ Banking, one of the largest banks in Australasia, whose shares yield more than 5 per cent; and First Pacific, a Hong Kong-listed company with assets including telecoms, infrastructure and mining.
Mark Williams is co-manager of the Liontrust Asia Income fund
