2019 Best Asia-Pacific Equity Fund Winner Q&A - Affin Hwang Select Asia (ex Jpn) Div

To help our readers better observe what makes a successful fund house, we sent out questionnaires to the winning teams earlier and asked them to shed lights on their team structure, how various risks have affected their investment decisions, and the major portfolio changes over last year, etc.

Morningstar 29.03.2019
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Category Winner: Best Asia-Pacific Equity Fund - Affin Hwang Select Asia (ex Jpn) Div

Key Stats
Inception Date: 2014-12-08
Total Net Assets (Mil) (2019-03-28): USD 594.96
Manager: 
David Kong Cheong Ng

M: Morningstar D: David Ng, Deputy Managing Director & Chief Investment Officer, Affin Hwang Asset Management

M: Can you highlight any major changes you made to the portfolio over the course of 2018? Were there any particular holding(s) that drove the fund’s performance for the year? 

D: The major change in 2018 was our cash holding. In early 2018, the fund held minimal cash. Subsequently, the fund raised cash aggressively between June and October as the trade war conflict escalated and China growth decelerated. Throughout this period, the fund was in a high-defense mode.

As market sell-down accelerated in Oct 2018, we decided to re-evaluate our defensive stance. At that time, we took a view that the market sell-down was overdone, and a global recession was not imminent. As a result, we started re-investing the excess cash into stocks with a focus on companies with healthy balance sheets and held strong competitive advantage in Nov and Dec 2018. 

M: What is your outlook for 2019 specific to the markets you cover, and how are you positioned to take advantage of opportunities and/or mitigate potential risks? 

D: After the market sell-down in 2018, we started 2019 expecting a better year as reflected by our portfolio action in the final two months of 2018. Our constructive views were premised on the ongoing step-up in China stimulus and a mildly-positive outcome from the US-China trade negotiation. 

The gradual increase of China stimulus could help to stabilise or modestly accelerate economic growth in 2H’19. As many Asian countries export to China, these countries would also benefit from an uptick in growth and a stronger economic footing in China. 

A stronger economic momentum in Asia could also help support Asian currencies. If Asia currencies were to strengthen in 2H’19 that would also be supportive of Asian stock markets.

While we are constructive, we are also conscious of several risks which will be discussed below.

M: How have financial market risks, such as the ongoing trade war between the United States and China and tightening monetary policies in major economies, impacted your recent investment decisions? What are some underreported risks that could surface in 2019 or beyond?

D: We believe that the trade war issue will start to abate in 2019 compared to its height in 2018. The US and China are likely to come to a deal as both countries are incentivised to reach an agreement. China needs a deal to prevent further deceleration in economic growth that may trigger social instability. US presidential elections are also slated to take place in end-2020, and as such Trump is incentivised to maintain a stable financial market as well as a buoyant economy in the US to win elections. 

By end 2018, the US stock market fell by about 20% due to concerns of an aggressive trade war flaring up. Consequently, Trump softened his tone and in early 2019, we subsequently saw the US stock market rebounding to current levels.

While we expect a positive outcome of the US-China trade deal in 2019, we believe that US-China geopolitical tensions will be a long-term risk. For instance, we would not be surprised if the US were to escalate its trade conflict with China after the 2020 elections.

There are two related but underreported risks in our view. The first is the decline of USD liquidity. USD liquidity has been falling as the US Federal Reserve (Fed) embarks on quantitative tightening (QT). A decline in USD liquidity often leads to a weaker US stock market.  A sharp decline in US stock market could reverberate across regionally and drag down the rest of global stock indices.  

The second is the resumption of Fed rate hikes. After four hikes in 2018, the Fed is now pausing from further hikes. The market is now pricing-in no further rate hikes for the rest of 2019. In our view, the US economy remains healthy and US inflation could gradually rise. As such, there is a fair chance that the Fed may resume its rate hike path in the 2H’19. This may surprise the market and lead to pullbacks in the bond and equity market. 

M: How is your investment team organized? Have there been any changes to the investment team or structure over the past year? Do you anticipate adding to the team in the near future? 

D: There are 13 of us following the Asia Pacific and US stock markets, and about 7 of us following the Malaysian stock market. On top of that, we also have 14 colleagues from the fixed income team who track global bond markets. 

M: Where do you feel that the investment team or the investment process can be improved upon in the future? 

D: We are in the process of increasing the depth of our coverage of the China market (particularly A-share market) as it gains prominence. Major index providers such as MSCI has recently decided to increase the weight of China A-shares in the Emerging Market index and Asia ex-Japan index.

On the other hand, we are also increasing our coverage of developed markets. Besides finding stock ideas in developed markets, it also benefits our Asian coverage as insights gained in developed markets are relevant to Asian markets. For example, industry insights of the semiconductor sector in the US helps us better analyse the Asian semiconductor space.

 

View all Morningstar Malaysia Fund Awards 2019 articles here.

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