Clean Energy in Asia

The future of the world’s climate may depend largely on decisions currently being taken by Asian governments and consumers. The rise in world temperatures since 1980 correlates closely with the rapid industrialization of China (which, like India, depends for 70% of its electricity on coal-based power). In the past 3 years, Beijing has made a massive investment in solar and wind power, in natural gas, and more recently in Electric vehicles. Gasoline driven cars and trucks will be banned in China by 2030. All this is prompted by the serious health consequences of pollution in China’s capital and its environs. Today 55% of world solar output and 30% of wind, is generated in China. The Chinese automobile industry will probably lead in electric vehicle production by 2020, Geely alone making 1.5 million electric cars and trucks: But VW, GM and Ford have also been stimulated by China’s direction, to announce US$5 to US$10 billion capital investments each in EV production. Where China leads, it is probable that the rest of Asia will follow. India is 20 years behind in industrial development, infrastructure, and alternative energy, but will rapidly catch up. The Modi government has made the largest single solar energy investment in the world (58 gigawatts with a target of nearly 50% from renewables); like Africa, it has the benefit of near year-round sunny weather.

China has committed to spend US$360 billion on clean energy projects, about 2.5% of GDP, and to create 13 million renewable jobs by 2020. This will include hydro, nuclear, wind and solar, as well as electric vehicles, and natural gas as an alternative to coal. China has a problem of heavy pollution as it emits twice as many greenhouse gases as the United States. While the official standard for PM 2.5, or noxious particles in the air, is 10 micrograms (the World Health Organization), in China the average is 58; in the EU, it is 15; and in the United States, it is 8 micrograms.

Although China has improved from the very high levels of 2012, there are still only 25% of Chinese cities which have passed air quality standards; and it is estimated that 1.1 million Chinese citizens have died from heavy PM 2.5 exposure (or 40% of global pollution deaths in 2015). Nearly 40% of these noxious PM 2.5 are from coal, and the government is now trying to cap the coal-fired power plants, and increase natural gas from 6.2% to 10% of energy production by 2020 – converting residences in the northeast of China around Beijing from coal to gas.

Wind capacity will be increased to 210 gigawatts by 2020, and solar energy capacity to 250 gigawatts. China dominates the global solar industry, producing 50% of polysilicon, 87% of wafer, 70% solar cells, and 75% of solar modules. China’s own domestic demand is about 50% of total global installations in 2017, followed by USA and India.

President Trump’s recent decision to impose a 30% tariff on solar imports from China will have a big impact on the market. (India also has a 70% import duty on Chinese solar cells and modules.) Hydro capacity will grow to 380 gigawatts, but China is going to reach a limit to the number of dams it can create except in the southern provinces, for instance, on the Mekong River which has a big impact on Laos, Thailand, Cambodia, and Vietnam.

Finally, on electric vehicles, China has seen rapid growth already of 130% compound annual increase for the past 5 years, followed by Norway, Japan, and USA. China’s demand accounts for about half of global demand and supplies more than 60% of the world’s EV battery capacity. In 2016, electric vehicles accounted for 2% of all automobiles in China, rising to 4% in 2020, and a possible 25% in 2025. The main manufacturers are BYD (30% market share), Geely (15%), BAIC and Zotye. We believe that the best investment prospects are for Geely, which has demonstrated their management capabilities in their successful absorption of Volvo and their ambitious plans to be 30% of the electric vehicle market in the next 5 years. China is also investing heavily into the key commodities for the new batteries, acquiring lithium mines in Chile and cobalt mines in the Congo.

India is the second fastest growing renewable energy market, globally, after China, already about 18% of total energy capacity. It has attracted $6 Bn. of foreign investment in this sector. Prime Minister Modi has proposed building new model cities powered only by solar energy.

On my recent three-week trip around Asia, which comprised China, Hong Kong, Thailand, Cambodia, Australia, and India, I observed that the impact of China’s investment and tourism continues to be a dominant factor in all the Southeast Asian countries, especially the smaller nations. India has tried to counterbalance China, inviting all the 8 (or 10) leaders of the ASEAN countries to their National Republic Day on January 26. India, under Mr. Modi, is a confident expanding economy which has made great strides to improve transparency and clean up the abuses of the past.

In Australia, I observed that the impact of Chinese overseas investment has now rapidly reduced since Xi Jinping’s government tightened up controls on capital outflows. From 2016, when Chinese buyers accounted for 40% of new property sales, particularly in Sydney, this has now fallen to 1% by the end of 2017. Some major commercial developments have been cancelled, such as Wanda’s Sydney office building. The Chinese government announced a year ago, that capital controls were to curb “irrational” overseas investments in real estate, hotels, cinema, media, sports clubs, and other noncore businesses. They are, however, still intent on acquiring strategic industries in technology, finance, energy, and food. 43% of China’s overseas investment goes to the USA, followed by Hong Kong (18%) and Australia (15%).

Even London has felt the impact of Chinese investors, both mainland and Hong Kong, in city commercial property, as well as residential units. London presents a spectacle of multiple cranes and large building construction projects, which, however, have generally been decided on, and commenced, prior to the June 2016 Brexit vote. Now there is some sense that the British capital is running “on empty” as the decisions of major investment banks to relocate thousands of their key traders and executives to Frankfurt, Paris and Dublin are increasingly important in their impact on London property and retail activity. Kensington and Chelsea properties are already down 20%-30%.

We are in a new era approaching 2020 where liquid securities, such as Bitcoin and easily realizable equities and currencies (but not government bonds, now in a bear market as it passes 2.7% on the 10-year Treasury), are more desirable than real assets such as property. The key factor will be what happens in the currency markets. We continue to believe that the weakness in the US dollar may be a temporary phenomenon, but a generalized crisis of confidence in central banks and leading currencies by 2020, could result in a reversion to gold as a safe haven.

We have just done a study of the Chinese gold market. Although the USA continues to hold the largest official reserves of 8,000 tons (out of the total world holdings of 171,000 tons), it is also interesting to note that the largest private gold hoard in the world is in India, with over 20,000 metric tons, followed by China, now estimated at 19,500. The actual reported gold reserves are under 2,000 tons in the People’s Bank of China, but we estimate that the real gold reserves could exceed 4,000 tons as the Chinese are continuously buying all their domestic gold production, which is nearly 500 tons a year, the largest in the world, ahead of Australia, and also importing 1,300 tons through Hong Kong, in the last reported year of 2016.

Since the Shanghai Gold Exchange began operating two years ago, this importation and dealing has rapidly expanded. In addition, as China’s middle class expands and becomes more confident and wealthy and travels more widely, there is a growing demand for gold jewelry.  The two listed gold mines, Zhaojin and Zijin, are, in our view, less interesting than the most competitive Australian gold mines, which we have invested in.

Finally, I would like to mention to our readers that the Chinese New Year falls on 16 February when the Year of the Earth Dog begins. In the past, this has been a good year for investors, most recently in 1970, with some increased volatility.  We are launching our China New Era Fund by the end of March since we believe that the next five years will see a rapid expansion of the A Share market in Shanghai and Shenzhen as it becomes open to international investors and is included in the MSCI Emerging Market Index.  We have seen our Indian Ocean Fund rise 30% since launch in December 2016, and Bamboo Asia also growing by 36% over the same period up to 31 January 2018.

Additional Note

This is a healthy correction. The markets are pointing to economic strength, rising wages, and (mild) inflation after a long period of slow growth and deflation since 2008.  Corporate earnings will continue to be robust after the US corporate tax cut.  Asia will be one of the principal beneficiaries, both in exports and domestic consumption (especially in China and India).  Free trade has not, after all, been curtailed.  The Trans-Pacific Partnership is still alive.

After a 40% rise in 15 months, we have a 10% decline; and, in the long run, we see this as a buying opportunity. We are reviewing all our core conviction positions to see if cash flow, earnings, debt ratios, PEs, and yields still justify repurchase today.  In most instances, we still see strong profit growth and reasonable valuations on a “Price/Earnings to Growth” basis.

Robert Lloyd George
8 February 2018
Hong Kong

Will Inflation Return?

With almost full employment, and with commodity prices rising, it is possible that 2018 (despite money supply slowing down) may see the first glimmer of a trend of rising prices. Many investors consider that the July 2016 low of 1.34% yield on 10 year US Treasuries marked the peak of the bond bull market, which has been going since 1981 (and Paul Volcker’s crackdown on 15% inflation).

The surprising aspect of today’s world is that despite the quadrupling of central bank’s balance sheets since 2009 (and the quadrupling of global money supply), there is no apparent rise in CPI official inflation.  But everyday experience tells us otherwise.  (And we recall Disraeli’s words, “There are three kinds of lies:  lies, damned lies, and statistics.”)

Certainly in Asia, inflation remains historically low, although to take the example of Japan, which has been in deflation since 1990, there is now definitely a positive trend towards higher prices. (Japan’s central bank target is 2% CPI.)  And in both China and India, we expect that the interest rate cycle and the inflation trend has bottomed out and will slowly trend upwards (as the Federal Reserve, under its new chairman, Jerome Powell, also expects).

In our investment strategy, therefore, we are looking for the most laggard performing sectors of 2017 to surprise on the upside, notably mining and energy. We have recently added Vedanta to our Indian Ocean Fund portfolio:  it is controlled by Anil Agarwal and has an excellent diversified portfolio of minerals, including copper, zinc, and aluminum as well as energy assets.  We are reevaluating Reliance Industries as India’s largest oil refiner.

In East Asia, we see the rise of natural gas as being the key trend towards curbing pollution. While some Australian and international energy companies will benefit, there may also be local beneficiaries:  Hong Kong China Gas, Sinopec Kantons and China Gas Holdings.

We have confidentially received a recent report, made by a think tank in China, about China’s coming energy crunch, which suggests that domestic oil production in China will peak in 2018 and that China is now scrambling, as a national security priority, to secure overseas energy assets. Part of this strategy is to secure the South China Sea through militarizing the coral reefs and laying claim to the undersea oil and gas basin that may be in that off-shore region.  Also, China is rapidly investing in natural gas, both through LNG facilities and building ships, mainly to transport liquid natural gas from Australia and Papua New Guinea.  Other suppliers may be Qatari, Middle Eastern, Russian, and Kazakhstan gas producers.  Hence the strategic thinking behind the “One Belt One Road” vision of Xi Jinping.  It is very much in China’s long-term interests to have secure energy supply and military control over the supply routes, whether at sea or over land (on the Silk Road).

Although we are bullish on Indian GDP in 2018 and the first February national budget, which should be pro-business, we are also concerned about the gradual rise of inflation in India (Wholesale Price Index 3.9% and Consumer Price Index 4.9%). However, despite the rise in oil prices and the strange calm in the gold market, we see the Indian Rupee strengthening against the US dollar.  It is now 64, which is the strongest level for over 2 years.

Regarding India, we have continually focused on the ‘inclusion’ of many poorer Indian citizens into the modern economy and financial system, epitomised by the opening of 300 million new bank accounts in the past 3 or 4 years, and the ownership of iPhones.   This is symbolic of a larger change in the world which has seen such an extraordinary and positive progress in the past generation.  Every day the number people living in extreme poverty (under US$2 a day) goes down by 200,000.  Every day 325,000 more people (according to Oxford University) gain access to electricity and to clean drinking water).  As recently as 1960, a majority of the human population were illiterate and living in extreme poverty.  Now these figures are less than 10% and some observers believe that the end of poverty is in sight by 2030.  Recently, polio has been almost completely eradicated, along with a number of other debilitating diseases, in developing countries.  India is a poster child for all these improvements and education, and electricity go hand in hand with the general economic improvement

The key to 2018 investment trends may be the direction of the US dollar, which continues to be weak against the Euro and Asian currencies. However, now that the Tax Reform has been passed, capital may very well flow back into the USA, with corporation tax reduced from 35% to 21%, (many nations will now have to compete.)

We remain confident that despite the possible rise in interest rates to 2.5% in the US, the bull market remains intact, especially in Asia where growth in trade and corporate profits remain strong, and currencies are still well-supported against the US dollar. We are contrarian investors and look for underpriced opportunities in places where other investors fear to tread or where there is a perceived risk, such as the Korean Peninsula (South Korean technology shares are looking very attractive).  Our 5-year forecast continues to be that India will be the standout investment opportunity because of its economic and political transformation, which is now being translated into higher economic growth and stronger corporate performance, as well as a strengthening Rupee, under the leadership of Narendra Modi.


Robert Lloyd George
9 January 2018
Hong Kong

 

Asia in 2018

The economic outlook for the coming year in Asia remains bright, and there are many strong trends for growth and profitability which encourage us in our search for good companies at reasonable valuations. Even India, where the market appears to be on a high P/E valuation, is probably on the verge of a construction boom, particularly in the ‘affordable housing’ sector.

In China, too, the fears of a debt crisis or a property collapse have receded and there is every expectation that, even if growth slows to 5%-6%, the private sector and the internet, education, healthcare, travel, and e-commerce industries will continue to grow at an average of 15%. We are actively looking at healthcare and technology opportunities in the A Share markets, especially in Shenzhen.  We see 2018 as being a banner year for China, as domestic markets begin to be included in the international benchmarks and the huge store of savings in China flows increasingly into the share markets, rather than property speculation (as Xi Jinping said in October, “A house is for living in, not for speculation”) or overseas destinations.

However, one key aspect of our analysis is the impact of disruptive technologies, as the internet has impacted so many sectors: book shops (Amazon), taxis (Uber), hotels (Airbnb), stamps (e-mail), automobiles (electric vehicles), possibly medicine, law, and even politics (tweets). We are increasingly cautious of the risks that disruption can bring to our investment strategy.  The area we are now focused on is banks, since the rise of the bitcoin to almost US$20,000 is a symbolic, but strong, signal that blockchain technology has arrived and it will have a deep impact over the next 5 or 10 years on retail banks, investment banks, and even central banks.  Perhaps the era of unlimited money printing is going to arrive at a moment of truth by 2020.

As one seasoned investor observes, “Bitcoin is a gold disruptor,” and it is surprising to see that gold, which also has a limited supply and is acceptable in all nations through history, has not moved at all, while the new digital currency (is it really secure?) has soared 20 times in a year. But it is surely a banking industry disruptor and although we have a short-term bullish stance on private sector banks in India, in Thailand, in Indonesia, and selectively in Hong Kong and China, we can see, over the next decade, a severe shrinking of the European banking industry.  The consolidation in the US has already happened to some extent, and the winners, such as JP Morgan and Wells Fargo, are clear.

In addition, in China we have the phenomenon of Alipay and the money market fund, launched by Alibaba, which has already garnered US$230 billion over 4 years, which surely poses a severe challenge to the dominance of the Chinese banks. In a state (and party) dominated economy, however, the outcome is likely to be different.  Though Google, Facebook, and Amazon may face monopoly challenges in Europe and North America, it is more likely that Baidu, Alibaba, and Tencent will be “co-opted” by the party to serve the interests of China, Inc.  We do not yet anticipate severe costs to shareholders in these companies.

Clearly 2018 will differ from 2017 in that the focus on technology will shift to the next phase of consolidation. Also, we are looking (on the “Dogs of the Dow” principle) at neglected and undervalued sectors, such as energy and mining.

In India, the scene will be dominated by the approaching election in May, 2019. Two major government policies – “Electricity for All by 2019” and “Housing for All by 2022” – will lead to a boom in construction and infrastructure.  Our investment strategy has recently focused on cement, mortgage lending, and property development companies.

We expect that GDP growth in India will reaccelerate from 6.3% in the 3rd quarter to nearer 7% next year. The government has indicated that they will simplify corporate taxation by reducing rate and streamlining allowable deductions.  Although we believe that the interest rate cycle is near the bottom, the Indian stock market could have another good year in 2018 with favourable base post demonetization, GST and possible recovery in investment cycle.

China is experiencing a slowdown, and tightening of monetary conditions, following the anti-corruption crackdown. Paradoxically, this lays the foundation for strong performance in the Shanghai and Shenzhen markets.  Chinese exports are benefitting from a recovery in global demand.  A consolidation in overcapacity industries (steel, coal, cement, shipbuilding, construction) may lead to better results and clear winners.

In the auto industry, for instance, where annual sales reached 25 million units last year, we have identified one winner – Geely – whose sales grew nearly 70% and is aiming to sell 1.8 million electric vehicles per year by 2020 which is more than 30% of the national target.

The investment opportunity, as we see it, is very much one of a careful stock selection, both in Hong Kong and China, for the most undervalued growth opportunities. We shall also be scouring the Southeast Asian markets for similar opportunities:  our favourites remain Vietnam and Thailand, while Malaysia continues to disappoint.

Our Indian Ocean Fund has had a good debut in its first 12 months, rising 17% (despite the cost of having 10% in Pakistan, which we have now exited). The total return on our Indian investments within the portfolio is just under 30% in its first 12 months.  Bangladesh, Sri Lanka, Vietnam, and South Africa (only in the Tencent holding Company, Naspers) have all performed well.

In our regional Bamboo strategy, we have slimmed down the portfolio to 25 core positions, and, after a year of strong performance, have taken some profits to bring cash levels to 15%. Our core philosophy is first not to lose money, second to re-examine every position regularly to see if anything has changed, “Would we still buy the shares at this level?”, and third, to focus always on our core convictions.

Fundamentally, we see that Asia (the 70% core of the Emerging Market asset class) has lagged for several years behind the US market, and in 2017, has begun to catch up, a movement that we confidently expect to continue through the end of 2018.

 

Robert Lloyd George
15 December 2017
Hong Kong

China’s “New Era”

I have just spent some days in Southern China visiting Guangzhou (Canton) and Shenzhen. Guangzhou, population of 14 million, is the capital of Guangdong province, the 80 million Cantonese-speaking province of southern China and traditionally the entryway for foreign traders since the early 1800’s and before.  From 1957 the Canton trade fair was also the only outlet for Western businessmen during the Maoist period, and it still continues today.  The most fascinating aspect of Guangzhou today is that it has an estimated population of 200,000 Africans (mainly from Nigeria, Kenya, Tanzania and other nations), the largest in Asia, and almost 150,000 Middle Eastern business people from Egypt, Iran, Turkey and other Arab countries.  The old trading routes from China to the Middle East and Africa are alive and well with strong exports of clothing, electrical goods, light fixtures, leather shoes and bags, and many other products that are shipped to Africa.

Even though China’s factory labour costs have risen to about US$1,000 per month (so that Vietnam and Bangladesh particularly can compete on low cost manufactured goods), China still has a very strong market share, and an excellent distribution system, and will maintain its strong export growth to the emerging countries. When we consider that Africa is going from 1 billion to 2 billion in population in the next 30 years (it will contribute most of the demographic growth in the world over the next 30 years), it is no accident that China has built up such strong links to the African continent, as well as the Muslim world.

Going on to Shenzhen, which was a village when I arrived in Hong Kong 1982, is now China’s 3rd largest city with 15 million people, and is expected to overtake Hong Kong in GDP by 2018, was fascinating.  We visited some of the high tech companies such as Hytera (a global competitor to Motorola), Han’s Laser (which is a major Apple supplier, for laser equipment components, with nearly US$2 billion of sales, which grew by around 70% from the previous year), Tencent (which sports a market capitalisation of US$430 billion, and demonstrated some of their new AR (augmented reality) and VR (virtual reality) video games of which only one, “Honour of Kings” has RMB40 billion (US$7 billion) annual sales).

In Shenzhen one has the impression of a frontier town, with entrepreneurial energy, the ‘silicon valley’ of China, with a lot of bright young people coming in from all the interior provinces creating a very vibrant atmosphere. There are many small technology and medical companies, and the new part of the city resembles Singapore, with green tree lined avenues, excellent road systems and modern buildings and infrastructure.  It is like Pudong in Shanghai, but greener – a futurist vision of what China is creating today, and why China is, in both high tech and low tech, a formidable competitor and continues to be a very successful economy, in both domestic consumption and exports, into the developing world.

On October 25th, President Xi Jinping led out his new team of 7 senior politburo members.  Our analysis indicates that these men demonstrate a combination of liberal economic reform as well as strong party control and ideology (Xi Jinping thought is now to be included in the Chinese constitution).  We expect that China’s economic growth may indeed slow to 5%, but that the shift from infrastructure and export led growth toward consumer or domestic demand led growth will accelerate.  We are focused on key sectors such as healthcare, education, consumer spending, internet and travel and tourism where we see double digit growth continuing.  The Chinese Renminbi is likely to be stable.  Reforms of the over indebted SOEs in certain industries such as steel, chemicals, cement, shipping even banks and telecom, (which all have over- capacity problems), will be accelerated and may offer investment opportunities as national champions are identified in each major industry. All together we remain positive about China’s unstoppable momentum towards becoming the world’s major economy, with a growing geopolitical footprint across Eurasia through the ‘One Belt One Road’ initiative, which is already transforming economies such as Pakistan, Belarus, Kazakhstan, Cambodia, Laos, Sri Lanka, and even Ghana and other African nations.  The one mistake that western investors consistently make is to underestimate – or even to short-China, its economy, market and currency.  We are based in Hong Kong, we have a Chinese speaking team and we believe that on the ground research into Chinese A-Shares will be one of the winning strategies of the next 10 years.

In India too, we continue to see consistent reforms being delivered by Mr Modi’s administration. Most recently he has announced US$32 billion of new capital to bail out the state owned banks and their large non-performing loan portfolios.  This has resulted in State Bank of India, for example, jumping 23% in a day.  Our holdings include HDFC Bank, ICICI, Yes Bank, Gruh Finance and Kotak Mahindra among other smaller financials.  These are all well run private sector banks and mortgage companies which we believe will continue to gain market share and reward shareholders.  We do not generally want to be shareholders in state owned companies or banks in the major Asian markets because, as minority shareholders, we want our interests to be aligned with those of the controlling shareholder.

Japan has also had an important election in the past week, which has given Mr Abe a strong majority to pass his long planned reform of the Japanese constitution. This will allow the Japanese military to be rebuilt and to spend more than 1% of GDP on defense. Coupled with China’s growing military power and spending and the unstable situation in North Korea, (which was a major theme of the Japanese election), this does not bode well for peace in North Asia.  However, the Japanese market looks increasingly attractive, and with the Yen at 113 versus the US dollar, corporate earnings are likely to exceed expectations and we see more gains ahead in Japanese shares.

In South Korea there has been a period of depressed earnings owing to the Chinese ban on tours to Seoul, which have particularly affected retail, hotels and cosmetics companies. There is some suggestion that this ban may be lifted, and that there could be a recovery in Korean consumer shares.  Samsung Electronics also has exceeded all expectations and continues to be one of the leading regional technology plays, along with Tencent, TSMC, Alibaba and Baidu.  Unlike the ‘FANGS’, (Facebook, Amazon, Netflix and Google), which are likely to come under more antitrust and antimonopoly pressure from US authorities, we do not see such a risk in China, where the power of the e-commerce sector such as Alibaba and JD.com and the search engines such as Baidu, or the video game sector such as Tencent, are unlikely to be curbed by the Chinese authorities.

As investors, we try to take the long view and use the best information available to intuit the disruptive technologies that are coming, and how they will affect the incumbent leaders of industries. In the past decade we have seen an enormous effect already on travel, on stockbroking, on taxis, on hotels and even on education and medicine.  The rapid ascent of artificial intelligence is an important theme in our investing universe and China may well be one of the regions where we see this development play out most rapidly.  Medical technology also is an area where we expect Chinese research to surprise investors.  We have made a number of visits to Chinese pharmaceutical and other medical companies, which are very promising.

2018 is shaping up to be another year of continued growth and performance in the world’s equity markets, driven by the enormous availability of savings and low bank deposit and bond yields, with which equities are favourably compared. Some of the froth may be going out of the high-priced property markets in London, New York and perhaps Hong Kong and the Chinese cities, and some of that speculative capital may be redirected towards stock markets.  At least, that is how we are seeing things in Shanghai and Shenzhen.  The lure of new technologies and medical breakthroughs will be as exciting in our view over the next decade, as the speculation in property assets has been in the past 20 years.

In our Bamboo strategy, we are now 95% invested, as we are in the Indian Ocean Fund, and in the course of redeploying capital we have greatly increased exposure both to China as well as India. The only risks that we currently are monitoring are the external factors such as what the Federal Reserve policy is likely to be under new leadership, whether inflation might re-appear in 2018 and propel interest rates higher, and what is the expected direction of the US dollar?  In Asia itself we do not see outsized risks as long as the political leadership remains in place, and the long term reform strategies are followed.

In January 2018 we plan to launch a US$100 million China New Era Fund in which we will target a concentrated portfolio of the best A Shares, H Shares, and Chinese technology small cap companies. As we have successfully achieved in India, we believe that a long term horizon coupled with intensive research and local knowledge can pay off for our investors.

Robert Lloyd George
1st November 2017
Hong Kong

India and China Reflections on 25 years and a Look Forward

I was invited to speak in Shanghai on 18 September about our two major Asian Emerging Markets and my experience in investing in them. Since we began, the average annual return in India has been 13.6% in US dollar terms over the past 25 years, compared to 12.9% in China, with the respective economies growing at a nominal GDP 13.5% and 15.2%.  What is interesting in the following chart is that today the US market is valued at a 150% of GDP while China and India are still around 70%.  For any US or international investors looking at the world today, it must be evident that growth in the next 10 years will continue to come from Asia and specifically from the spending of the growing middle class consumers in the region, which are estimated to reach 380 million in India, 350 million in China and 210 million in other Asian countries, so that 90% of the next billion people joining the middle class will be in Asia (adjusted for purchasing power parity).

Part of my bullish forward analysis comes from the fact that many of these middle class consumers are also investors in their own share markets, and that we see, for example in India today, that flows into the capital markets are coming much more from domestic investors than foreign investors. In China there is a shift away from real estate into equities and other financial products.  Although both countries have a debt problem, (this is not unique when we think of Europe and the US today), their respective growth rates of 6 to 8% will help them to grow out of this debt.  In addition, it is worth reflecting on the fact that the PBoC (China Central Bank) has expanded its money supply by more than the Federal Reserve, the Bank of Japan and the Bank of England combined. One comment that I heard in Shanghai was that the China A-Shares, (the domestic Chinese equities), were receiving “a wall of money” which is supporting the economy and the financial system.

The 19th National Congress of the Communist Party of China will be held on October 18th, and will be very important in cementing President Xi Jinping’s leadership, and the reform policy which we expect him to follow.  China A-Shares will also be included in the MSCI Emerging Markets Index by May 2018, and we expect a significant capital inflow from international institutions in anticipation of this important change.  Both the Chinese Renminbi and the Indian Rupee have strengthened this year against the US Dollar, and we forecast political, economic and currency stability in the next few years.  Both Mr Modi in India and President Xi Jinping in China are attacking corruption.  This is the “Key-Man Risk” in investing in each nation.

The sectors which we select in both markets are similar: internet, e-commerce, consumer, travel and tourism, healthcare and education. Just as in the United States where the technology sector has been leading the market, so too in China there is a highly advanced internet market led by Alibaba, JD.com, Baidu and Tencent.

In India, in the ten months since demonetisation, there has been a shift from a 70% cash economy to around 40%, with rapid growth in digital and online payments. India today is at the take-off point where China was 10 years ago in terms of infrastructure, internet, e-commerce and accelerating economic growth.  Based on the successful model that we have developed for the Indian Ocean Fund, where we have experienced local advisors in Mumbai, Pakistan and Bangladesh, we have now identified such a partner in China that will enable us to invest capital for our clients into China A- Shares, especially in the small and mid-cap companies listed both in Shenzhen and Shanghai.  This is where we see the most interesting investment opportunities for the next decade.

Robert Lloyd George
1 October 2017
Hong Kong

China Deleverages

China has not collapsed. There is no financial crisis in China. Instead, China is undergoing a gradual deleveraging of its financial sector. As far as we can judge from published statistics, this has been successfully managed by the authorities and confidence has returned to the Chinese market. The RMB is strengthening against the US dollar and foreign exchange reserves have climbed back above US$3 trillion. The money market has tightened. 3 month Shanghai Interbank Rate has risen to 4.43%, and 7-day reverse repo rate to 2.81%: Both the Producer Manufacturing Index and industrial profits are rising gradually. GDP growth is likely to continue at 6% plus in the 4Q, although much will depend on the property and construction sector, which accounts for nearly 20% of GDP.

We are planning to launch our “China Hedged Investment” (CHI) Fund in October. We continue to believe that exceptional investment opportunities exist in the healthcare, tourism, education, and internet sectors.

In India, there has been some volatility over the summer but the Rupee remains strong and corporate earnings are growing over 15%, especially in the small and midcap sector of consumer goods.

Among the losers in August were the public sector banks, which fell 11.6% on news of increased nonperforming loans. It is worth emphasizing that the private sector banks, such as HDFC, ICICI, Yes Bank, among others which we own, have not been so negatively affected. In fact, they continue to report strong profit growth and relatively low NPLs. During the month of August, the Reserve Bank of India also cut its policy rate by 25 basis points, taking the Repo Rate to 6%, in line with market expectations. Inflation is forecast at 3.5% for the next year. The monsoon has been quite satisfactory, and India’s agricultural sector continues to do well. However, the impact of demonetization and the new Goods and Services Tax (GST) introduced July 1st is now visible in the GDP growth falling to 5.7% for the quarter ending June vs. 6.9% in the previous quarter. This may continue into the next quarter ending September.

By contrast, the Pakistan market continues to vex long-term investors with its heightened volatility (caused mainly by the political fallout after the Prime Minister’s resignation and a large US fine against Habib Bank): As a result we have reduced our exposure to 6%. Sri Lanka (6.5%), Vietnam (5%), Bangladesh (3%), Mauritius (2.5%) and Naspers in S. Africa (3%) continue to outperform and provide excellent diversification to the core commitment in India.

As the US economy continues to be remarkably resilient (3% GDP growth in the last quarter), despite Hurricane Harvey’s impact on energy, agriculture, and insurance, as well as cancelled flights, and disruption in the distribution of food, and other goods due to the floods, this will certainly affect Asian economies, which continue to be dependent on US demand. However, China now accounts for 8% of Asian trade.

Even commodity prices have strengthened in the past 3 to 6 months.

In “The Rational Optimist,” Matt Ridley eloquently makes the case that humanity’s worst fears about the future are not usually realized; that in most fields – medicine, nutrition, education, longevity – human life is improving steadily. The “outliers”, or exceptions to this optimistic assessment of the global economy, such as North Korea, only make it more convincing.  Somehow or other, the threat of Kim Jong-un’s crazy behaviour (especially this week in directing a missile over Hokkaido), will have to be neutralized.  Asia continues to be a region of extraordinary growth and rapid reduction in poverty (especially in China and India).

 

 

Robert Lloyd George
8 September 2017
Hong Kong

Hong Kong – Twenty Years Later

On July 1st, President Xi Jinping paid his first visit to Hong Kong to celebrate 20 years since Britain handed over the territory to China in 1997, and to inaugurate a new Chief Executive, Carrie Lam (the first woman CE and a welcome change from her predecessor C Y Leung).

I would like to reflect on Hong Kong as a corporate base for Lloyd George Management, as an investment market, and for its larger meaning for China. We have been based in Hong Kong since 1992 (and in our newer incarnation since 2014) and I have been personally resident and domiciled here since March 1982.  In 35 years, Hong Kong has gone through some remarkable changes, but it remains a dynamic business centre with low taxes, an excellent legal system and infrastructure, and minimal government interference in business.  Nobody who has lived in Hong Kong can fail to love the place for its energy, dynamism, quirky Cantonese-speaking “can-do” spirit of efficiency, and the beauty of its mountains, islands and parks.  But in the past few years, the mood has changed among Hong Kong people (especially the younger generation) to one of frustration, and anger, at the gradual erosion of freedom, and the high-priced rents and living costs of the city (akin to London, New York and other financial centres, but more extreme).

The older generation, especially grandparents who were refugees from China in 1949/50 might well say “Look how lucky you are to live in a free city where you can make money, travel freely, and enjoy international education, books, ideas and lifestyle”. But the issues of democracy, human rights and freedom will not go away as the death of Nobel Prize winner Liu Xiaobo reminds us.  Hence Hong Kong – whose economic importance as a percentage of China’s output has diminished since 1997 from 20% to 3% – continues to have an outsized political meaning and importance for China. (And behind all this, looms the question of Taiwan)

Since Xi Jinping came to power in 2010, there has been a steady regression to rigid Communist Party controls, including even Hong Kong’s educational system which is now supposed to teach China’s history according to the Party’s handbook. When Hong Kong publishers of books on China’s leadership were whisked away in the night by China’s State Security Police,  there was a frisson of fear among the population – so much for “One Country, Two Systems” continuing until 2047.  And the 2014 “Umbrella Movement” was ostensibly not only a protest by students against the erosion of democracy, but equally the erosion of their economic dreams and property aspirations.

Yet it is true to say that Hong Kong has in the financial sector at least progressed to being an important centre for listing Chinese shares, and being a conduit for Chinese capital via the “HK-Shanghai” and “HK Shenzhen” Connect. In this respect it is important for overseas investors to focus on the continuing discount of “H” shares (Hong Kong listing) compared to “A” shares in Shanghai and Shenzhen.  The mainland China market (market cap US$7.9 trillion, number of listed companies 3,300) continues to be driven to the tune of 80% by retail investors, with high PE ratios and inadequate research – compared to the Hong Kong market (market cap US$3.8 trillion, number of listed companies 2,060) which has low PEs, high dividend yields, low price/book (or price/NAV for property shares), and an intensively researched institutional market.  Over the past 20 years, the leadership of the market has shifted dramatically from banks, properties and trading houses, to Chinese SOEs.

Despite the temporary strength of the Chinese Renminbi against the US dollar/HK dollar, it seems clear that the desire of PRC investors to expatriate their capital (very often for their families) will not diminish in the next few years. Hong Kong is the first destination for this capital, being in a good legal jurisdiction with Trust Law and a sound internationally convertible currency. The strength of the Hong Kong share market in 2017 bears witness to this growing influx of mainland money, as do the sky-high rents and property prices. The proportion of mainland buyers in the Hong Kong property market has grown from 12% to 14% of the total transacted value over the last one and a half years, pushing property prices to increase by 25% over the same period.  Mainland investors have also targeted the share market through H-shares, registering CNY160bn (US$24bn) in net southbound inflows – double the amount that went north. The Hang Seng Index in 2017 (24% year to date) has outperformed the Shanghai Composite by 18% and the Shenzhen Composite by 28%. The movement of the A-share/H-share premium over the past three years demonstrates this change in sentiment, from the northbound inflow of newly permitted foreign institutional investors buying A-Shares that caused the premium to expand to 150% in the peak of 2015, (i.e. A-shares traded at a 50% premium to its dual listed H-share equivalent), to a subsequent contraction of the premium to as low as 115% when Chinese investors sought dollar denominated equities. Our conclusion is Hong Kong blue chips remain attractive for Chinese investors as a hedge against the depreciating Chinese Renminbi.

In May 2018, we will see MSCI include China A-shares in their global index for the first time. With a capitalisation of US$7.5 trillion, China will initially comprise about 25% of the Global Emerging Market index, and with full inclusion about 40%. This is an unprecedented change, given the size of the market, compared to Pakistan added this year or UAE, Qatar and Saudi Arabia two or three years ago.  Currently, there is US$2 trillion in index funds or ETFs benchmarked to the MSCI Emerging Market index and we will expect significant inflows of international money to enter the China market for the first time in many years.

We are now working on the launch of a China Hedged Investment vehicle which will comprise A-shares as well as H-shares and international listed companies. While we retain our long term optimism about China, we have concerns about the short term direction.  On the one hand President Xi Jinping appears to have made rapid progress in cleaning up corruption and excluding all his rivals (especially the recent change of leadership in Chongqing).  On the other hand, there is an expectation, as we go to press in early August, that the USA may be on the point of taking its first trade measure against China, probably to do with steel dumping, or intellectual property concerns.  This would be a shock to the market, after 6 months of relative calm, as the Dow Jones Index has just recently passed 22,000 and the Hang Seng Index has also followed up strongly.  We are therefore in a cautious tactical position over the summer, looking for great buying opportunities in Hong Kong and China by the last quarter of the year.

Robert Lloyd George
3 August 2017
Hong Kong

South Korea and Vietnam

This month I have made visits to two of the most impressive and interesting Asian markets. South Korea now has an economy which is, in many respect, more advanced than most European economies with an income per capita near to US$30,000, and US$600 billion of exports, half of which is machinery and automobiles.  They are now also a substantial investor in the emerging nations of Asia, especially Vietnam, where they are (with Japan) the largest source of foreign direct investment (and Samsung Electronics alone, accounts for 20% of Vietnam’s exports).  In fact Vietnam, alone among ASEAN nations has the same intensive private education emphasis as the North Asian nations (Japan, Korea, China and Taiwan).

It is interesting to reflect that it is just over 40 years, since the end of the war in Vietnam in 1975, and the unification of South and North Vietnam. This is now a young, dynamic and progressive country with half the population under 30 years old, and a tremendous thirst for self- improvement.  For instance, we visited the Vietnamese software company (FPT) which reminded me of the Indian software company, Infosys, 20 years ago.  They are training 17,000 students a year and pay their software engineers competitive salaries compared to India.  They have a particularly strong position in servicing major Japanese corporations.

Although from the US perspective, North Korea looks very threatening, the surprising thing is that on the ground in Seoul, people are so accustomed to living 30 miles from North Korea, that (after 64 years) of living with a “crazy neighbour” it is no longer a daily concern. South Korean investors are much more focused on whether the new government, under President Moon Jae-in will be able to reform the Chaebols, and improve corporate governance, transparency and dividend payout ratios. From being the most leveraged companies in the world in 1998, Korean companies are now the most cash rich, and the market is selling on a PE of 9x and less than 1x book (including Samsung Electronics with a PE of 8x).  There are also many smaller companies like Nasmedia, NCSoft and Naver in the on-line, video game, and digital advertising businesses which despite the sluggish South Korean economy, are achieving 20 to 30% earnings growth.

Korea is an impressive and disciplined Confucian culture, but it also has a creative side visible in the popular TV shows, the Gangnam music, and in the business creativity of the younger generation in these new internet fields, and the digital sector. The immediate problem for the Korean consumer and hotel companies is the collapse of Chinese tourism, as a result of the freezing of tours by China, after the Terminal High Altitude Area Defense system.  We expect this situation may take a year to resolve, but longer term, the real question is whether Trump and Xi Jinping will make a deal to denuclearise the peninsula, remove Kim Jong-un, and enable China to have an unchallenged regional influence, while allowing a reunited Korea to develop economically. This would be very positive for Korean shares.

The US military has just moved to a very expensive new base outside of Seoul, so there is no immediate sign that a deal is imminent, but it is something worth considering as an outside possibility. North Korea is also developing more capitalist tendencies and this will slowly undermine the monolithic totalitarian rule.

As for Re-Unification, the previous examples of Vietnam (since 1975) and Germany (since 1990) suggest that the cost, and the time for Korea to reunify and rebuild the shattered economy of the North would be a huge drain on their resources (the estimated GDP of North Korea is US$12.38 billion with an estimated population of about 25 million, compared to South Korea with US$1,443 billion and 50 million population).

Meanwhile, in China, my concern remains that despite the professed desire of the government to have a smooth transition to the autumn 19th National Congress of the Communist Party of China, the over investment and the debt bubbles are still at extremes, and the level of property prices remains very inflated. We are beginning to see some signs of weakness now in Shenzhen, and of course in Hong Kong which is also very high.  This summer we expect a correction to begin in these inflated property markets.  The risk in China is not so much economic as political: if there is any factional discord ahead of the party meeting, this will certainly spill over into the markets.

India has seen the introduction of the Goods and Services Tax on July 1st and as far as we can judge it has been a smooth process, as the demonetisation was last year, improving the transparency and level playing field of Indian business, and reducing a large part of the ‘black economy’ which has been estimated to be up to 40% of GDP. There is an increase in M&A activity – one of our preferred financial groups, Shriram City Union, has been the target of a takeover bid by IDFC. Among Mr Modi’s achievements in the past 3 years, has been an increase in FDI to about US$50 billion annually, a reduction in India’s external deficit from 5% to less than 1%, and a fall in inflation to 2%, so that today India is one of best performing emerging markets, with the Rupee up 5% this year.

In Pakistan, there has been some currency and political instability but we take a long term view of our investments in the Frontier Markets and are gradually adding to core positions there and in Bangladesh, Sri Lanka and Vietnam.

In conclusion, the risk for Asian markets over the summer remains the global risk of rising rates, and “tapering” QE, but we believe that any correction will prove a long term buying opportunity in the East.

Robert Lloyd George
14 July 2017
Hong Kong

Inflection Points

The study of historical cycles has, for many years, suggested a seasonality and decennial cycle in sunspots, human psychology, and stock prices. The mania of 2017 reflects closely the mania of 2007, or even perhaps 1999 (1997 in Asia), which was followed by the “dot com” bubble and collapse.

The narrow character of the market’s steady ascent, for months now, has been focused on the FAANGs (Facebook, Apple, Amazon, Netflix, Google) in the US market and BATS (Baidu, Alibaba, Tencent, as well as TSMC, and Samsung) in Asia. One must ask oneself how far this phenomenal rise in technology valuations can go, and is it justified by future earnings?  The market has possibly discounted too far forward as it did in 2000 – interest rates will rise, growth will slow, property will depreciate, and share prices will most likely follow.

In May, we had two important elections. I was in Paris on Sunday, May 14, at the inauguration of Emmanuel Macron, who has impressed all observers by his youthful energy and determination and the expected success of his party, En Marche, in the legislative elections coming in June.  Simultaneously, in South Korea, Dr. Moon Jae In has overturned ten years of conservative rule, following the impeachment of President Park and formed a strong reforming government, which is likely to try to improve relations both with North Korea and with China and possibly remove the American Missile Defense System (THAAD).  More importantly for investors, Dr. Moon has appointed some longstanding advocates of corporate governance reform to target the top four Chaebol groups – that is, Samsung, Hyundai, LG, and SK.  Between them, these four account for 50% of the Korean market capitalization.

The Kospi, or Korean Index, is now on 1X book and 9X earnings, even though it has risen by 25% this year, based on earnings growth and, in particular, on the strength of Samsung Electronics, which is about one-third of the market. But the market still has great potential to get re-rated if the reform effort is successful in persuading these large Korean conglomerates to restructure and reward their shareholders properly (as we have seen happen in Japan in the past three years).  The Korean companies are cash rich and pay very low dividends, and we expect to see a significant improvement in the next two years, which could result in a 50% premium improvement in the multiple of the Korean market.

In addition, we are seeing improvements in the least-loved market in Southeast Asia – that is Malaysia, where the ringgit is up 5% against the dollar and the economic growth has accelerated to nearly 6%. Indonesia and the Philippines are more popular among investors, but we see more risk, both political and economic, as their monetary policy tightens.

For the month of May the mid-cap index in India fell by 4.2% (in dollars) while the large cap index gained by 2.4%. Both domestic institutional investors as well as foreign institutional investors were net buyers, and we believe the volatility in mid cap stocks was generated by high networth investors. However, the market is happy with the March 2017 quarterly earnings and is looking forward to a further 20% profit growth in the year to March 2018. Initial views for this year’s monsoon forecast have been normal according to the Indian national weather service. The Goods and Service tax appears to be on track for implementation by July 1, 2017 and this could be supply disruptive in the short term. However, it will benefit the corporate sector and government revenues, in the long run. We are long-term holders of Indian shares and continue our policy of patient accumulation.

Regarding China, there continues to be evidence of economic and business momentum, especially in the internet and travel sectors. With the withdrawal of the USA from the Paris Climate Accord, China is likely to step into the vacuum and become the leader in renewables, both solar, wind, and electric vehicles.  This will be a very interesting space to watch, and we should not underestimate the determination of the Chinese to succeed in alternative energy sources, given their own pollution problems.

In fact, both India and China are now rapidly scaling back their coal usage in favour of solar energy. It is these two of the world’s most populous countries, representing almost 40% of the world’s population, that have accounted for the greater part of the increase in carbon emissions over the past 20 years.  Perhaps we should be more optimistic about climate change and about global warming despite the decision of Trump to withdraw the USA from Paris Climate Agreement.  In addition, natural gas, in the form of LNG, is becoming a much more competitive energy source in Asia, and is also helping to reducing oil and coal consumption.

Robert Lloyd George
19 June 2017
Hong Kong

What’s next for China?

Although most investors focus on the US economy, China as the second biggest economy in the world, with US$11 trillion GNP needs close scrutiny. In addition it has an outsized impact, probably bigger than the US, on all its Asian trading partners and many emerging countries in Africa and Latin America.  For even some of the leading members of the European Union, such as Germany, China has become significant factor in their external trade.  Therefore, we are trying to dig down into the monthly data of the Chinese economy on a regular basis to understand the current trends.

In April, we have seen China’s economy slow down to a 6.9% growth rate with the PMI falling slightly to 51.2%. The People’s Bank of China (PBOC) has tightened up policy with M2 growth falling to 10.5% and sales volume in property also falling 10% yoy.  Some commodity prices such as iron ore weakened as a result of the slowdown in China’s infrastructure spending and construction demand.  As a result of tighter control on foreign remittances by Chinese citizens, the Renminbi has remained steady against the dollar, and foreign exchange reserves rose slightly to over US$3 trillion.

Last week, we have seen the “One Belt, One Road” forum held in Beijing with President Xi Jinping, making commitments of up to US$130 billion in loans and infrastructure spending in Central Asia, Pakistan, Sri Lanka and in South East Asia. The impact on smaller economies such as Pakistan, Sri Lanka, Laos, Cambodia, Thailand and Vietnam is significant, and it appears now that over 130 countries including most of the European nations have committed to join China’s efforts in the Asian Infrastructure Investment Bank and the new Silk Road vision.  This could prove an epochal transformation in many areas of Eurasia over the next 20 years, compared by some observers to the Marshall plan, promoted by the US in Europe in the late 1940s.  This time China is the leading player in promoting trade and globalisation, whereas the US, under Trump, appears to be retreating from its trade and military commitments in Asia.  It therefore becomes more than ever important that China’s own domestic economy continues to grow and have the financial strength and health to support these ambitious overseas projects.

For some time, we have been conscious of the growing risk of the domestic debt which is estimated at between 250 to 300 percent of GDP. However, like Japan in 1990, this is almost entirely internal debt owed by local municipalities to the Central government or by state owned SOE’s to state banks.  It is therefore within the power of the PBOC to regulate and reorganise as they have done before. This fact is often forgotten by Western observers who wrongly speculated on a severe slow down or even crash in China in early 2016.  It has not happened.  On the contrary, China has re-accelerated its infrastructure spending and its industrial growth.  The latest GDP figure shows a steady 6.9%, but, as Premier Li Keqiang famously observed, we should disregard the headline number and look at railway freight (19.6% yoy), electricity usage (7.9% yoy) and exports (8% yoy).

The most remarkable recovery in the 1st quarter in 2017 was seen in the property sector across China, which has shown a strong rebound, and share prices of Chinese property companies have risen 25 to 30%.  However, we now see some monetary tightening by the PBOC and an excess of new supply of residential and commercial space in many cities which is beginning to weigh on prices.  The artificial stimulus to the real estate sector was in part caused by the November 2016 clampdown on capital outflows in order to stabilise the Renminbi and maintain China’s forex reserves at US$3 trillion. This may, however, be a short-lived phenomenon and our opinion is, that property values in many leading cities in China, as well as second tier cities, will begin to fall in the second half of this year.  What is harder to ascertain or predict, is the impact that this may have on consumer sentiment, and on consumer spending, as well as tourism, travel, education, healthcare and e-commerce, which are the leading growth sectors, in which we have invested.  We tend to believe that these sectors will maintain double digit growth, in the face of a slowdown in the state owned sectors of heavy industry including steel, aluminium, energy and construction in China. That is also why we are carefully watching the prices of iron ore (down 25% this year), copper (down 5%), steel, and of course oil and gas.  Australia, as one of the principal suppliers of iron ore, coal and LNG to China, may be one of the regional economies which is most severely affected by a cut back in Chinese orders in these raw materials.

One recent example of China’s outsized influence was in South Korea, where in July 2016, the Americans announced the Terminal High Altitude Area Defense (“THAAD”). The Chinese authorities reacted with fury and cut back immediately on purchases of Korean made goods, and tourism numbers from China to South Korea plunged by 60%. With the election of the new liberal President, Moon Jae-in, who is taking a softer line on North Korea (and may request the removal of the THAAD), we expect that China trade with Seoul will quickly recover and consider some Korean consumer companies to be undervalued on that basis.

The key issue will be what happens in US-China relations? On April 8, when President Xi Jinping visited Donald Trump in his “winter White House” in Florida, what was mainly discussed, apart from North Korea, was the issue of trade. Wilbur Ross, the US Secretary of Commerce, announced that they were commencing a 100-day review of China’s trade practices especially in sensitive areas such as steel and aluminum.  We therefore expect some actions to be taken by the US Commerce Department, by the beginning of July, and believe that this could have a shock effect on investor sentiment, which has so far viewed Trump, while eccentric, as following a sensible pro-business policy with regard to China, in contrast to his outlandish campaign promises to brand China as a currency speculator and so on.  In fact, the Renminbi has been abnormally stable against the dollar since Trump’s inauguration in January.  We expect that if some US trade measures are announced, that China will quickly retaliate, and perhaps a devaluation of the Renminbi would be more probable in the second half of the year.  In any case, a tussle between the two elephants of the world economy will certainly mean that the lesser economies, especially the Asian exporters which are tied into the supply chain for technology, among other sectors will be trampled on.

India, however, is of course an exception to this view of Asia, because it has little direct trade with China and not that much with the USA. The one area, which we have already seen affected by the H1B visa situation becoming more uncertain, is the IT sector, with companies like Infosys and Tata Consulting being negatively viewed.  Also some Indian pharmaceutical companies have come under the purview of the FDA which has also held back share prices.  For the other 80% of the Indian stock market, we have seen strong performance in domestic consumer companies, as well as the financial sector, led by banks such as Yes Bank, ICICI, HDFC and smaller names like Gruh Finance and Shriram City which have all benefitted from being go ahead private sector banks, innovative, and prepared for the digital transactions which have multiplied since the demonetisation on November 8 last year. In addition, the Indian Rupee has surprisingly appreciated by 5% against the US dollar since the beginning of the year.  We are, therefore, looking at gains of nearly 15% in our Indian Ocean Fund in the past few months, and our broader Bamboo Asia strategy is up 22% year to date.  We remain somewhat cautious about the next 3 to 6 months and intend to try and lock in these gains and preserve capital as much as possible.

Most of our companies have been producing very good earnings results, for instance, China Lodging came out with some very good numbers, net revenue grew 10.8% yoy and net income grew 113% yoy to RMB148 million. China Lodging now has 3,336 hotels or 335,900 hotel rooms with average hotel occupancy rate at 83.9%.  As of March 31, the company’s loyalty program had 814 million members who contributed more than 77% of room nights sold in 1Q2017.  TAL Education’s latest numbers showed net revenues up 81% yoy driven by student enrolments up 70% yoy to 1.34 million in a quarter.  Among the Indian holdings, Gruh Finance and HDFC Bank among the financial reported excellent quarterly numbers with growth in Net Interest Income by 18.6% yoy and 21.5%, respectively and good control over the asset quality, while Maruti Suzuki surpassed our expectation with revenue growth of 20.3% and profit after tax growth of 15.8% yoy.

In our broad Bamboo strategy, which has 25 “conviction” positions, we also have some defensive shares such as Link Reit and AIA in Hong Kong, and our Malaysian exposure in BAT and Public Bank, which has not performed yet but we see as a defensive diversification.   We also have some exposure to gold and oil through Evolution Mining in Australia and PTT in Thailand.  The oil price has been fairly weak recently but we expect that it will recover towards the second half of the year.

We are wholly focussed on picking great companies which we intend to own for five years, and believe that this “buy and hold”, dollar cost averaging, low turnover approach, which we have especially followed in our Indian Ocean Fund because of liquidity constraints, will be the most successful route to consistent outperformance of the passive indices and benchmarks. There is a real opportunity today for a return to traditional stock picking instead of low cost indexed products and we aim to consistently outperform our benchmarks in order to justify our existence.

Robert Lloyd George

15 May 2017

Hong Kong