Portfolio review
The Fund fell -0.3% in June, trailing global markets for the month (1.9%). Global markets fell -0.7% in USD terms, with a decent fall in the Australian dollar providing a cushion for Australian investors.
If May was characterised by a lack of direction, June was about“divergence”. President Trump’s trade rhetoric and increasing “titfor tat” replies from China and Europe dominated headlines and markets. US markets were up 0.5%, but in contrast Emerging Markets (-4.6%), Asia Ex Japan (-4.1%) and Japan (-2.6%) all suffered sizeable losses for the month.
The largest detractor for the month was our position in China Everbright. Stock specific news was minimal, but like many of our holdings in Asia, the stock was caught up in the China selloff (- 10%), and dropped 16% over the month. The stock was stopped out to prevent further losses. The Manager is of the view that this is not stock specific and will actively consider re-entering after the stop loss “cooling off” period.
On the positive side, a large contributor was China Water Affairs. The company reported earnings post the end of the month, which were well ahead of consensus expectations, with the stock outperforming into those results. The company increased the dividend and announced an additional special dividend. The Manager has done several calls with management now, along with one-on-one meetings in Beijing and Tokyo, and we still believe this stock is under-appreciated by the market, trading on 10x P/E with good growth prospects.
Outlook
There is a fine line between conviction and stubbornness, and one must always try to adapt views to reality. The Fund had consistently positioned in 2018 for the view that looking through“Trump tirades” was the optimal course of action. Market price action, particularly in our area of focus, Asia, over the last three months has not supported this view.
Reflective of adapting to this reality, cash levels were raised, with the net exposure decreased towards the end of the month. It appears Chinese credit growth is slowing in the background and global growth indicators continue to slow outside the USA – and this is before any tariffs come in.
For now though, we don’t see the bear market beginning just yet. A flattening yield curve and widening credit spreads from low levels tends to be normal late cycle behaviour in which equities perform well.
Long USD and JPY exposure was increased over the month. More discussion on our outlook is to follow in the Half Yearly report to investors, which will be published later this month.