(July 24): An economic recovery in the US and a surge in the country’s equity markets following the unlikely election of President Donald Trump have hogged the headlines over the past 12 months. But the best-performing Singapore-registered equity funds have been those holding Chinese and European stocks. And, these funds appear set to impress further.
According to Morningstar data, Chinese equity funds made up about a third of the top 30 equity funds by performance. European equity funds were the second-best performers, making up about a quarter of the list. The remaining top-performing funds were those with holdings in Asia-Pacific ex-Japan equities — which include Chinese equities — as well as those investing in Japanese equities and global emerging-market equities.
Investec GSF All China Equity A Acc USD — the best-performing Chinese equity fund — recorded a return of 44.9% in the one-year period to July 17. This compares with the 12.3% and 21.4% rise in the CSI 300 and Hang Seng indices, respectively, in the same period. The fund invests in domestic A-shares and offshore Chinese markets, with an overweight on consumer discretionary and IT stocks. Its top holdings as at May 31 included Tencent Holdings, Alibaba Group Holding and Ping An Insurance Group.
The fund’s manager Greg Kuhnert says his fund’s outperformance is due to “some very strong stock picks” from the two sectors. “Inside consumer discretionary, a great stock pick has been Geely Automobile Holdings. Geely has seen a big improvement in its earnings due to new models in the SUV category, which have been very well received by consumers because of improving quality and brand perception,” he tells The Edge Singapore via email.
“In the technology sector, Sunny Optical has been an outstanding performer. This company makes optical lenses for cameras in smartphones and has done really well [selling to] Chinese handset vendors, which have been gaining share in China versus the foreign brands. They are also increasing their business in lenses used in cameras installed on [car dashboards], which earns them high margins.”
Among the Asia-Pacific-focused equity funds, those with significant holdings in China-linked equities did especially well. One of them is the Schroder Asian Growth SGD fund, which returned 34.9% in the one-year period to July 17. Its aim is to achieve long-term capital growth by holding stocks in Asia ex-Japan, Australia and New Zealand. AIA Group, China Pacific Insurance Group and China Lodging Group are some of its top holdings.
Toby Hudson, head of Asia ex-Japan equity investments at Schroder Investment Management, says the fund’s stock selection in China contributed most of its gains. “The biggest driver of performance was our overweight to private-sector, new economy stocks in the technology and consumer discretionary sectors. This was further supported by the zero exposure to Chinese banks, which remained under pressure owing to concerns over rising bad debt,” he says.
Among the top European equity funds is the HSBC GIF Euroland Equity AD fund. The fund, which seeks long-term capital growth through investments in European stocks, returned 34.6% in the one-year period to July 17. It outperformed the 20.9%, 20% and 25.1% increases in the respective Euro Stoxx 50, CAC 40 and DAX indices in the same period. Its largest exposures are to French and German equities such as AXA, Deutsche Post and Allianz.
Frédéric Leguay, head of European equities at HSBC Global Asset Management, says the fund’s outperformance was due to its “good stock selection”. This was the result of the fund’s relative value and contrarian style in the immediate aftermath of the UK’s vote to exit the European Union, which saw a strong rebound of value and cyclical stocks, he explains.
Strength in Chinese and European growth
Market experts say the rally in the equity markets in China, Hong Kong and Europe has been driven by the recent strength in economic recovery. China, the world’s second-largest economy, grew faster than expected in 2Q2017. It recorded growth of 6.9% — the same rate as that in 1Q2017 — on strong export growth, according to data from the National Bureau of Statistics released on July 17. Analysts were expecting China to record a 6.8% growth for the quarter.
While the reflation trade story in US took a back seat, it was “very much active” in China, says Suresh Tantia, investment strategist at Credit Suisse. He notes that factory-gate inflation rebounded 5.5% in June, helping to lift corporate earnings. In contrast, the new US administration has struggled to deliver the much-anticipated plans for corporate tax rate cuts and infrastructure projects.
Moreover, trading volumes have accelerated, thanks to the Shanghai-Hong Kong Stock Connect established in 2014. This cross-boundary investment channel allows investors in the Chinese and Hong Kong markets to trade shares on each other’s markets using their local brokers and clearing houses. “Therefore, a confluence of strong economic momentum, earnings recovery and liquidity has driven the rally in the Chinese equity market in 1H,” says Tantia.
CMC Markets analyst Margaret Yang agrees, but notes that the Hong Kong market has received a bigger boost. The Hang Seng Index has registered a 21.4% return in the last 12 months compared with the Shanghai Composite Index’s 4% return. “The rally in Hong Kong shares was driven by improving fundamental conditions as well as southbound flows via the stock connection,” she says. “A muted onshore stock market and increasing restrictions on property investment channelled capital to the south… seeking value and diversification.”
In Europe, the equity rally has also been largely driven by the strength in the economic recovery there. “Though the upswing in macro momentum over the past few months has been global, the eurozone has seen a much stronger acceleration, with leading economic indicators reaching a six-year high. Given Europe’s dependence on the global economy and export growth, a synchronised recovery is leading to strong earnings growth, underpinning the rally in European markets,” Tantia says.
Political risks, which had threatened the equity markets there, have receded following the election of French President Emmanuel Macron. That has led to a contraction in the equity risk premium, which investors require to invest in European equities, he adds.
Mixed outlook
Some market watchers think the run-up in Chinese equities is coming to an end, though. James Cheo, investment strategist at Bank of Singapore, says the stop-go policy cycle seen in China over the past few years is swinging back to a tightening stance to limit credit expansion. The stop-go cycle refers to the government’s decisions to occasionally rein in growth to prevent debt levels from rising too much, while applying at other times fiscal or monetary stimulus to prevent the economy from slowing and causing too much unemployment.
Cheo says any slowdown ahead is likely to moderate with the government’s desire for stability ahead of the Communist Party’s leadership transition in 4Q, though. “Looking ahead, we expect economic momentum to continue to soften into 2H2017 despite Hong Kong and China markets edging up. With declining positive economic surprises — along with weakening producer prices — earnings upgrades, which had been a key driver, would fade,” he says.
Catherine Yeung, investment director at Fidelity International, says the risk is that China will tighten “too quickly and too aggressively”. That will distract the country from stabilising and nurturing its economic growth, she adds. China has been destocking its property market and reducing supply capacity in the coal and steel industries. Now, the country has shifted its focus to deleveraging, given the recent positive economic data.
Other fund managers, however, are optimistic. Howard Wang, who manages the JPM Greater China A (acc) SGD fund, believes the “spillover” to the real economy is limited so far. He continues to expect the consumer-facing business in “New China” to show both resilience and growth, leading the market higher in the near term. “In terms of valuations, both onshore and offshore China are still at reasonable levels after the recent rally, and we believe further rerating would come from structural growth sectors,” he says.
Meanwhile, prospects in Europe continue to appear positive. Tantia of Credit Suisse says European equities appear set to continue their rally as they are best positioned to meet, or even beat, their earnings growth expectations this year. He sees both domestic- and exportoriented companies benefiting from economic tailwinds, as macroeconomic momentum in the eurozone is at a multi-year high.
“We have had a positive stance on European equities since [earlier this year] and continue to stand by that view. Despite [the] strong run-up since the French election, eurozone equities should further benefit from the strong momentum and positive earnings trends,” says Tantia.
Dylan Ball, portfolio manager of the Templeton Euroland Fund, sees more opportunities ahead. The fund has returned 33% in the last 12 months, owing to its overweight position in the energy, healthcare and financial sectors. “We look to profit from mispriced valuations, which typically arise in times of crisis, and then look out three to five years to work out what these companies can earn in a normal environment,” he says. “Within the Euroland space, these three sectors have each passed through such a crisis since and allowed us to profit from the mispriced stocks.
How do fund data providers rate performance?
Much like the Oscars or the Golden Globe Awards in the film industry, the fund management industry also has its own awards in recognition of excellence. The best-performing funds in their respective categories are given awards following a rigorous evaluation. But what makes a fund a winner?
Across all fund categories, fund data providers typically look at the fund’s ability to deliver and sustain returns over the long term. Thomson Reuters Lipper, which runs the Thomson Reuters Lipper Fund Awards, looks for winners that have the highest “Lipper Leader for Consistent Return” measure for each of the three categories: three-, fiveand 10-year periods. This measure takes into account both short- and long-term risk-adjusted performance relative to fund classification.
The fund with the highest measure is declared the winner. “The consistent return measure is a richer risk-adjusted performance measure than others currently available in the marketplace,” Lipper says.
At the 2017 Thomson Reuters Lipper Fund Awards, the best equity Singapore fund over a threeyear period was awarded to the Nikko AM Shenton Thrift SGD fund. Over a five-year period, the Singapore Dividend Equity SGD fund was declared the winner. And over a 10-year period, the Aberdeen Singapore Equity SGD fund was declared the winner.
Morningstar, which runs the Morningstar International Fund Awards programme, says it aims to recognise funds and fund houses that have added the “most value within the context of a relevant peer group for investors” over the past year and beyond.
Its awards methodology takes into account the one-, three-and five-year returns. Funds also must have been at least in the top half of their respective peer groups in at least three of the past five calendar years. “We believe this combination will ensure that the awards are given to funds which have earned strong one-year results, and have also shown they have the ability to earn strong long-term returns without undue risk,” says Morningstar.
At the 2017 Morningstar Singapore Fund Awards, Schroders won three out of five fund category awards available. Its Schroder ISF Asian Opportunities A SGD Acc fund was declared the best Asia- Pacific equity fund and Schroder China Opportunities SGD fund the best Greater China equity fund. Among the global equity funds, the Schroder ISF Global Equity Yield A USD fund was the top fund.
Meanwhile, the iShares J.P. Morgan USD Asia Credit Bond Index ETF fund won the best Asia bond fund, while the Nikko AM Shenton Thrift SGD fund was the best Singapore equity fund.
As for the best-performing fund house awards, Morningstar identifies its winner based on asset class categories. For the best equity fund house award, fund houses with at least three equity funds with Morningstar ratings available for sale in a given market are eligible. Fidelity International was declared the winner. For the best fixed-income fund house award, fund houses with at least three fixed-income funds with Morningstar ratings available for sale in a given market are eligible. Money markets are not eligible for inclusion. UOB Asset Management was declared the winner.
At Lipper, the best-performing fund house for bond and equity classes were BlackRock and AllianceBernstein respectively. Schroders was the best-performing fund house for mixed assets and overall.
This article appeared in Issue 789 (July 24) of The Edge Singapore.
