Market review
Asia-Pacific markets experienced a highly volatile third quarter, driven primarily by fears that the US would enter a recession and sentiment that the Federal Reserve (Fed) was moving behind the curve as the US economy showed signs of weakening and yet interest rates remained elevated.
The technology sector meanwhile experienced a reversal in fortunes, no longer driving strong growth in the way it had in previous quarters, which also contributed to volatility. This volatility and correction in the technology sector largely aligned with our expectations.
However, markets experienced a revival towards the end of the quarter, recouping some of the past losses after the Fed acted on interest rates and delivered a cut of 50 basis points. This late-quarter recovery was also influenced by the People’s Bank of China delivering a series of policy changes aimed at stabilising the country’s property market and stimulating domestic consumption, including its own 50-basis-point rate cut and liquidity measures.
Fund activity
There were reversals in performance compared to the previous quarter at both sector and country level. Consumer discretionary and real estate were the largest contributors to performance, while technology and utilities struggled. By country, the largest contributors were Thailand, China and Hong Kong, while technology-centric markets, including Taiwan and Korea, underperformed.
At the stock level, the top five performers were BABA, Trip.com, AIA, KE Holdings and Citic Securities – all China- or Hong Kong-listed. The foremost detractors were concentrated around technology – Samsung, Meditek and Hynix – while Container Corp and Reliance Industries also underperformed.
It was a quiet quarter in terms of fund positioning changes. We reduced our overweight position in energy by taking profits from a select number of Indian energy stocks, reflecting our increased caution towards state-owned enterprises since the Indian election. We also slightly reduced our overweight position in IT, mainly by trimming our exposure to DRAM (computer memory) technology due to early signs of price weakening. We slightly narrowed our underweight position in financials.
The fund maintains its narrowly overweight position in China, where a strong performance bounce-back towards the end of the quarter helped to offset previous challenges.
Outlook
The Fed’s initiation of a rate-cutting cycle has lifted market sentiment globally, though we expect that the ability of Asia-Pacific central banks to follow suit will depend on the US’s future rate-cutting path.
We remain cautious in this regard, as market consensus on Asian central banks’ moves has previously proved too optimistic. Though we believe the worst has likely passed in terms of pressure on Asian currencies, tight credit conditions may be in place in the region for longer than other market players anticipate.
Sentiment towards Chinese equities improved markedly towards the end of the quarter and may improve further still amid high expectations of a significant fiscal package that may be delivered by the Chinese government after the Golden Week holiday. We share this positive sentiment – though maintain a degree of caution – and believe opportunities will be concentrated around Chinese domestic goods rather than export-led growth, with the extent of the potential for a continued rally driven largely by the size of the package.
We anticipate continued market volatility in large parts of the Asia-Pacific, due in part to ongoing conflict in the Middle East. The US election also poses a risk. However, we believe the main influence on the market during the upcoming quarter will be the future interest rate decisions by the Fed, which have the potential to contribute to volatility.
The Asia-Pacific region continues to be challenged by structural issues in China, including the ongoing downturn in the country’s property market, as well as deglobalisation and other geopolitical factors. For emerging Asia, sustainability compliance continues to be an issue, which has some impact on stock selection.
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.
