Market review
Asia-Pacific markets generally rose over the quarter, although it continued to trail the global market in relative performance.
Sentiment remained optimistic, appearing to align with a belief that the US will avoid a recession, creating benefits for Asia-Pacific exports. Bullish sentiment continued to bloom around artificial intelligence (AI), contributing to a rally around regional suppliers to US tech companies. The energy sector was also buoyant after oil prices increased during every month of the quarter.
However, expectations of an early rate cut by the US Federal Reserve (Fed), which would have likely strengthened Asian currencies, diminished. The recent policy pivot by the Bank of Japan, raising rates for the first time in 17 years, also failed to provide significant support for regional currencies as the yen continued to weaken.
Economic conditions in China remained challenging due to lingering concerns about the country’s property sector and scepticism regarding the benefits of a structural shift away from property-related activities. These factors also impacted Hong Kong markets, while its financial sector experienced volatility amid uncertainty around the timing of rate cuts.
Fund activity
Following a challenging period, the fund produced a positive return over the quarter and outperformed its benchmark. Noteworthy contributors to outperformance came from the technology, energy and utilities sectors. The fund displayed similar trends at a country level, with our tech-heavy Taiwan and energy-heavy India positioning contributing to performance. Taiwan benefited from bullish sentiment around AI, with Nvidia-supplier TSMC, the fund’s largest overweight stock, adding to outperformance. For India, contributions in the energy sector came from ONGC and Bharat Petroleum, as well as property developer DLF.
Healthcare underperformed across the quarter as geopolitical events challenged Chinese biotech. The US introduced the Biosecure Act, which aims to restrict business with Chinese biotech companies, prompting us to exit positions in WuXi Biologics and WuXi Apptec, the latter of which was a drag on performance. Our overweight position in Hong Kong life insurer AIA was also a detractor despite posting resilient earnings, influenced by conditions in China and volatility in financials more broadly.
These factors saw us reduce the fund’s overweight position in China to align more closely with the benchmark. The underweight positions in India and Taiwan were narrowed, due both to strong performances from existing positions and our addition of new companies: automotive companies Hero Motorcorp and Mahindra & Mahindra and healthcare company Sun Pharmaceutical Industries. In Taiwan, we increased our exposure to tech by adding Quanta Computer.
Outlook
Our outlook remains largely unchanged, with data from the US appearing to indicate reduced likelihood of a recession while GDP growth has been revised up. Stocking levels appear to have normalised after high levels of overstocking earlier in the pandemic and a subsequent period of destocking, which may indicate lower volatility in global supply chains. We expect these positive indicators to have a flow-on effect for the Asia-Pacific which, as an export-driven region, has high exposure to Western consumer demand.
However, inflation has proved sticky in the US, with the Consumer Price Index (CPI) increasing across December, January and February. Market sentiment appears to have aligned more closely with our view that interest rates will remain higher for longer. We expect the Federal Reserve to hold off on rate cuts until the second half of the year at the earliest and believe Asian central banks will follow suit. However, a later rate-cutting cycle will likely prolong tighter liquidity conditions, with higher real rates for many markets in the region.
The fund intends to maintain its overweight positions in technology and energy as these sectors continue to display positive data. We maintain an underweight position in deep cyclical sectors such as industrials and materials but may consider increasing our exposure if global and regional growth prospects improve.
The fund manager remains cautious towards China ahead of the US election in November, with most polls suggesting a swing toward Republican candidate Donald Trump. Such an outcome could strain US-China relations, with the potential for higher tariffs on Chinese imports, likely triggering volatility in Chinese markets.
Important information
The value of investments may fall as well as rise and investors may not get back the amount invested.
Due to the underlying assets held in the WS Canlife Asia Pacific Fund, the price of the fund is classed as having above average to high volatility.
The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice.
This document is issued for information only by Canada Life Asset Management. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available in the literature section.
Promotion approved 19/04/24
