Investment Manager Report


October 2020

Dear Valued Investors,

If you had told me everything that would happen in politics and the global economy over the last nine months, I would have bet heavily on a bear market. At the beginning of the year, I was using my experience with Swine Flu and SARS as a guide; I was not overly concerned about COVID-19. That turned out to be wrong, as far as the properties of the virus were concerned and in terms of the success or failure of government policy to combat it. However, the markets have not punished my misplaced optimism. Indeed, being wrong on the facts has led me to being more right than wrong on the markets, but for totally the wrong reasons—so how and why have markets performed so well, given that the real world is doing so badly?

In the U.S., it's partly because long bond yields collapsed, which helps support valuations; indeed it propels valuations to startling levels in some stocks. It's also partly because people, living more virtual lives, ascribed more value to more virtual companies. And, I suspect, partly because bored at home, they resorted to day trading and momentum trading so that some part of the rise in the market was superficial to say the least. The truth of this latter conjecture appears to be borne out by the fact that once stimulus was withdrawn, savings fell, yields rose and the momentum came out of the equity market.

In China, the markets have also celebrated a strong year so far. However, this success is perhaps more due to the success in controlling the virus' spread. There may be controversy around China's numbers but, in our view, China has more experience with virus outbreaks and reacted to COVID-19 in a more disciplined manner. Using the experience of SARS and Swine Flu as a guide to action has actually been quite useful and China's economy has revived to something closely resembling normality. I am tempted to therefore start my expectations of the next 12 months in China with my expectations as they were in late 2019—a moderate reflationary environment is likely to support faster earnings per share growth. China looks well placed.

In other parts of Asia, though, we have seen countries such as Japan, who have had great success against the virus but whose equity markets have not done quite as well as China. Perhaps this is due to the fact that Japan has had several years of stronger earnings growth relative to GDP and the cycle may be getting a bit old. Nevertheless, we were still able to find strong performance among the smaller companies. And there are countries such as India, who have struggled with the virus and whose markets have been less buoyant than the rest of the world, but nevertheless appear to have done far better than could reasonably have been expected. All of this leads me to suspect that many investors have been quick to write off 2020, to see through it to a more normal life in 2021. They have been patient, given the low yields on offer to fearful money.

Across our strategies, the weightings in China have risen markedly. This may in part be due to outperformance but is also because we generally see better fundamental backing for current valuations in China than we do in the rest of the region and the rest of the world. Because of this fundamental backing, Chinese equities seem less prone to possible disappointment surrounding any return to normality than markets in the U.S., Europe, or other parts of Asia.

Not yet fully convinced of China's underlying strength perhaps, international investors have only recently moved back into Chinese equities. I suspect that the overall environment was not conducive to looking outside the home country—both in terms of fear over the world's problems and excitement over the momentum in popular tech stocks. It may also have been because of concerns about U.S. – China relations and the potential for increased tension during the U.S. election in November. Now, however, investors appear to be accepting that whatever the outcome of the election, tensions are likely to lessen due to either a decrease in rhetoric or a containment policy more focused on issues of democracy and human rights. The direct impact on businesses, both U.S. and Chinese, may therefore be less extreme. Economics seems to be exerting its natural dominance over politics once again.

Which leaves us with the question of how the health care and tech sectors might behave given their strong run-up and the degree of speculation in these stocks. Well, first I note that the degree of speculation is likely greater in the U.S., given the lower yields and the fiscal and monetary stimulus. Second, is the fact that one person's speculation is another's risk-taking. It seems that many of the new companies in Asia are beneficiaries of structural changes that may be enduring. For example, China enjoys a more virtual everyday life more easily and naturally compared to the U.S. as China leapfrogs technologies and accepts mobile platforms, for example, more quickly. Or in health care, where new companies in China offer real innovation compared to the cheap generic manufacturing of the past. So, whereas there may be speculation, there will be long-term winners, too. It's a hard balance to strike but we devote much of our resources to endeavor the right balance and to identify secular growth companies rather than will-o'-the-wisps.

That is where our focus remains: on the companies. It's been a year dominated by macro. However, at least in the case of this investor, macro would have been a poor guide to correct decisions and good outcomes. Our team of investors continues to concentrate on the businesses and the people who run them. We may have had to stretch our imagination about the possible futures of many of these businesses, but we always try to relate that imagination to the concrete facts about successful business models that we see all around us. We are excited for the further evolution of Asia's markets and ready for the challenge of navigating them.


Robert Horrocks, PhD 
Chief Investment Officer