There is an old saying that there are decades where nothing happens, and weeks where decades happen. Given that – how many decades have we lived through over the past 2 years since the onset of the COVID pandemic?
We’ve had whole economy lockdowns, the sharpest fall into bear market territory for equity markets in history, followed by the quickest recovery from the shortest recession in history, a mini tech boom and bust, a reopening reflationary revamp for value stocks following vaccine Monday in November 2020, huge supply chain disruptions, the greatest inflationary impulse in nearly half a century, unprecedented monetary intervention with the use of helicopter money and now a war and growing concerns about recession risk.
By my maths, that’s ten decades worth of events.
It has been a very challenging period through which to manage the wealth entrusted in our care. The past two years has emphasised the importance of having a rigorous and disciplined investment process, whose foundation is built on intensive due diligence, a sharp eye on valuation and the construction of robust, well diversified portfolios able to weather uncertainty and that are not dependent on a highly unpredictable macro/geopolitical outcomes playing out to deliver returns.
Central to it all is our excellent access to best-in-class fund managers, spanning a vast array of asset classes from regional developed and emerging market equities, private to public markets, bonds to property, digital infrastructure to battery storage, music royalties to precious metals. During times of heightened uncertainty, getting daily insights from experts across this vast investible universe allows us to stay rational during irrational periods and reap the rewards of unearthing the opportunities volatility can create. A good example being Hipgnosis Songs which Ben Mackie wrote about in last week’s Crescendo. The COVID sell-off is another case in point with the 75 or so manager meetings we conducted in the immediate aftermath of that event, helping inform our decision making and idea generation no end.
This week, our attention has been firmly drawn towards China and Hong Kong, where market volatility has been nothing short of extraordinary. Earlier this week, both bond and equity markets suffered severe drawdowns. From the 10th to 15th March, the MSCI China Index declined -16%. This occurred on the back of several negative headlines, ranging from a new wave of lockdowns linked to rising COVID cases, five Chinese American Depositary Receipts (ASR, non-US companies that trade on US exchanges) being included on the SEC’s non-compliant list, Tencent facing a record fine for WeChat Pay’s violations on banking regulation, ongoing property developer concerns and fears that China could risk sanctions by aligning its foreign policy with Russia. Sharp price falls resulted in margin calls, which created more selling from forced position liquidation, and encouraged algorithmic traders to short the market too, creating even more selling. It was a perfect, capitulating storm.
Thankfully, the equity funds we use that have significant exposure to China/Hong Kong fared much better, with Prusik Asian Equity Income off -3.2% and CIM Dividend Income -8.1% (both held in all three funds) over the same period. Both portfolios offer dividend yields over 6%, have low exposure to the sectors most caught up in the selling (particularly tech/internet stocks), trade on exceptionally low valuation multiples relative to their own history, and offer decent prospects for capital growth on top of the attractive level of income. Last year, when the MSCI China fell -21%, CIM Dividend Income rose +25% and Prusik Asian Equity Income +8%. It is worth stressing that our exposure to the region is highly active, highly differentiated, and aims to invest with government tailwinds, not headwinds.
We quickly received reassurances from Prusik manager Tom Naughton and Asian credit manager Christina Bastin that the selloff appeared to be irrational and was being amplified by technical trading factors (margin calls/algorithmic trading), and that this wasn’t a time to panic. CIM manager James Morton was penning a letter excited that the equity market was offering one of the best opportunities of his 30-year career. Fast forward 24 hours, and the MSCI China had bounded back nearly +15%. Vice Premier of the People’s Republic of China Liu He gave a speech addressing a lot of the issues that markets were bearish on, namely addressing overseas listings/ADRs, HK markets and market stability, the Chinese property market, fiscal spending, and loan growth (encouraging banks to start lending again, including the property developers). This was a dramatic, pro-market policy shift that addressed most investor concerns.
It is easy to get swept away by negative headlines, but by having almost instant access to experts on the ground, we can rapidly assess the risks, get on the front foot and make well informed, rational decisions about positioning.
So another week passes, another decade of events completed – eleven and counting over the past two years.
Dan Cartridge – Assistant Fund Manager
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