Fund Manager(s): Andrew Swan
BGF Asian Dragon Fund
2017
SHORT INVESTMENT COMMENTARY
Performance
The Fund rose by 3.0% over the month, outperforming its benchmark, which gained 2.2%.
Asian equities shrugged off initial weakness and performed in line with the All-Country (AC) World index in April. The
MSCI AC World index hit an all-time high towards the end of the month. Year to date (YTD), the MSCI Asia Pacific
excluding Japan (APxJ) index has gained 14%, outperforming developed markets by 7%, the best YTD performance
since 2009. The risk to markets from rolling purchasing managers’ indices, geopolitical issues (the French presidential
election, the UK snap general election announcement and North Korea’s resumed provocation) and the fading belief
in the Trump stimulus all had an impact until mid-April. Encouragingly, Asian/emerging market equities have not
underperformed during this reversal. There was, however, a large skew in sector performance, with information
technology (+5%) and consumer discretionary (+2%) leading, while materials (-2%) and telecoms (-2%) lagged.
ASEAN (Association of Southeast Asian Nations) markets led the equity market performance for April. The Philippines
(5.5%), Malaysia (3.8%) and Indonesia (3.1%) were the top-performing markets for the month. Earnings expectations
and positive sentiment around tax reforms led the rally in the Philippines. All three markets witnessed significant
positive foreign flows. The Malaysian ringgit (1.9%), the Indian rupee (0.9%) and the New Taiwan dollar (0.4%) were
the best-performing currencies in APxJ. The ringgit appreciated on the back of recent liberalisation measures by Bank
Negara. The Korean won depreciated as foreign investors turned net sellers at the beginning of April amid geopolitical
tensions, but it pared losses as the tensions eased and foreign fund flows stayed positive.
In China, the domestic Shanghai Stock Exchange Composite index dropped 2% over the month due to fears about
policy tightening and a decline in margin financing (-1.5% in April). Chinese banks underperformed, with regulators
cracking down on shadow banking. The China Banking Regulatory Commission issued guidelines on 11 April for
banks to tighten up their risk management measures.
The Fund’s strong stock selection in China, India and Taiwan were the main contributors to its outperformance.
BBMG, our preferred cement holding in China, outperformed as the Chinese government announced plans to
establish a special economic area in Hebei Province in order to relocate the ‘noncapital’ functions away from Beijing.
The Xiongan New Area in Hebei Province will have national significance like the Shenzhen Special Economic Zone.
BBMG is the leading cement producer in the region, which will be a key beneficiary. Airtac, a Taiwanese pneumatic
component manufacturer, was another key contributor as it reported a record high in sales numbers for the month of
March. This was followed by first-quarter results which beat expectations on better operating margins from increasing
scale. Bharat Petroleum in India also rallied as state-run oil marketers announced that they will roll out a dynamic fuel
pricing pilot programme starting in five cities in India in May. The price of transport fuels that the companies charge
will be allowed to be changed daily (as opposed to the current scheme in which the price changes fortnightly) so as to
better reflect global crude oil prices.
On the other hand, Korean steel manufacturer POSCO retreated in April after a strong run over the last 12 months.
Steel prices softened over the last few weeks due to destocking activity by customers.
Portfolio Activity
In April, we bought Chinese independent power producer Huaneng Power as we think a potential pullback in the coal
price will help to alleviate independent power producers’ profitability, while any government regulatory intervention on
restricting supply expansion or phasing out current excess supply may help to lift returns back to more sustainable
levels.
In Indonesia, we took profit in and trimmed Bank Negara, where our conviction has reduced, and instead switched into
Bank Central Asia. The latter is preferred as the credit cost is coming down and the return on equity is normalising,
while valuations are still below its historical range and below those of its peers, despite growth prospects.
SHORT INVESTMENT COMMENTARY
BGF Asian Dragon Fund
February 2017
Within the information technology (IT) space, we trimmed our exposure to Taiwanese semiconductor company TSMC,
and used it to increase our overweight in Samsung Electronics, where we expect more upside to consensus earnings
forecasts this year in memory and organic light-emitting diodes. We also exited Korean internet company Naver as we
think the change in strategic direction will impact on near-term profitability.
Outlook and Positioning
We continue to lean on the improving cycle in Asia as earnings continue to normalise. We still believe that reflation will
remain a key theme for Asia and that growth will trump rate and trade risks.
Asian earnings are finally starting to recover after five years of stagnation. This is being driven by a combination of the
global and regional cyclical upturn and the cuts to corporate capital expenditure, which are helping margins. The
continuing recovery of nominal gross domestic product growth in China should not be underestimated for its impact on
lifting the whole region. This is placing Asia in a much more attractive position than it has been for some time.
Valuations in the Asian markets remain below long-term historical averages and already largely reflect negative
sentiment and positioning.
We remain most overweight Indonesia on expectations of the domestic economic improvement to start feeding into
local companies’ earnings. We are now overweight China, as improving domestic fundamentals are already feeding
into better earnings. We are most underweight Taiwan, given our caution on large-cap IT valuations, and Hong Kong
on the impact of rising rates on the economy. We continue to buy value exposure and have been increasing our
weight to financials.
SHORT INVESTMENT COMMENTARY
BGF Asian Dragon Fund
April 2017
Contact us
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