September, 2023
The K2 Asian Fund returned +0.83% for the month outperforming the index by +2.94%. The fund is now up +5.3% over the past three months. Maintaining an underweight to China has been positive for the fund.
The economic theme within the APAC Region over the past two years is the consistent weaker economic momentum for mainland China. The key challenge for the second largest economy is dealing with the consequences of the very sharp and depressed property construction sector. The impact on other key partial economic indicators has also been severe. This is clearly evident in the weak consumer and business sentiment. The high debt levels the property sector are also notable headwinds and a challenge for Beijing as they look to deliver another stimulus package to help drive domestic demand.
Given the challenges from the property sector in China, it is no surprise that monetary policy has been accommodative while other economies have been raising interest rates. The central bank, the PBOC has been stimulating their economy. While this has helped cushion the downside many challenges remain. In particular, the regulatory over reach by in 2021 has been a negative for global investors who remain underweight. Further, the large debt ratios and property construction sector headwinds have combined to hold back the China recovery.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/205414463.pdfAugust, 2023
The K2 Asian Fund returned -0.15% for the month. The weaker economic data pulse In China continued to weigh on market sentiment. This has been a consistent feature as the regular economic data flow reinforces the softer momentum for the second largest economy compared to expectations. Further, high government debt levels and concerns with the property market are key structural headwinds for Beijing. Hence the soft consumer and business sentiment creates additional challenges for policy makers to turn things around.
The policy response has been targeted and active with limited effect to date. The central bank in China, the PBOC has been persistent with their monetary stimulus over the past two years. While it is clear they are not too keen to go down the quantitative easing pathway, their stimulus is measured and pragmatic given the very large levels of debt within their property sector and municipal/local government level.
On the positive side, the recent weekly data flow in China indicates some consolidation of the run of weak partial economic Indicators. While there limited upside to the data flow by year-end, the worst looks to be behind for now as recent stimulus measures are expected cushion the downside. Economic revisions to China GDP will continue to be revised from the mid 5% levels earlier this year to just under 5%. The lower inflation data coming out of China is positive for other key global economies.
The recent announcement regarding the expanding BRIC economic members lead by China may be a positive longer-term alignment for additional free trade agreement and therefore economic activity However, in the shorter-term China will continue to rely increasingly on their domestic demand which will require additional stimulatory policy support. Further, the case for global investors to increase their exposure to longer duration investments remain limited. An underweight exposure will continue to remain for many developed market investors. Some scope for short term tactical positions
beneficiaries of the China slowdown within the region continues to be Japan. India and the South-east Asia region (including Australia). We continue to maintain underweight exposure to China and an overweight to South-East Asia Pacific. A focus on earnings that export to China Livs continues to be our preferred investment strategy.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/204377582.pdfJuly, 2023
The K2 Asian Fund returned 4.63% for the month to outperform the index. The strong monthly performance of the fund has been the result of the underweight to China and overweight to SE Asia, the Pacific and other global regions. Some of the best sector and stock contributors to the monthly performance have been the energy sector that includes Beach Energy (BPT), Karoon Energy (KAR) and Woodside (WPL). Other good performing sectors included financials, Kina Securities (KSL) and JP Morgan (JPM). Also, exposure to the NZ aged care and residential sector, Winton Land (WTN) and Summerset Group (SNZ).
Increasingly markets globally are becoming more comfortable with a soft economic landing scenario. The regular economic data flow from key leading developed economies reinforces the resilience of aggregate economic, credit conditions and earnings. The strong labour market conditions in the US have been supportive despite the most aggressive tightening cycle for a generation from the Fed. Further, the consumer and business sentiment indicators appear to be holding up in the US compared to other economies such as the EU region, the UK and Australia. Key global central banks, particularly the Fed are well placed to engineer a soft landing which implies that rates will stay higher for longer.
China continues to disappoint with ongoing weaker than expected economic data as conditions for households and corporations in China remain challenging. There are early signs of some consolidation within the China property sector that has witnessed a sever correction. Ultimately the central bank in China, the PBoC will need to continue their stimulus program, become a little more innovative with their policy and try to turn around investor and consumer confidence in mainland China. On the positive side, the lower inflation data coming out of China is positive for other key global economies. Within the broader APAC region, Japan, India and the South-east Asia region (including Australia) will continue attract investors as China works through their much needed economic stimulus and reforms.
We continue to maintain underweight exposure to China and an overweight to South-East Asia and Australia. A focus on earnings that export to China continues to be our preferred investment strategy as they look at additional stimulus going forward. The portfolio cash position is marginally lower at 5.1%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/203797515.pdfJune, 2023
The K2 Asian Fund returned -0.68% for the month to be -0.62% year-to-date (YTD).
The stalled economic recovery within China continues to weigh on market sentiment for the worlds second largest economy. While key developed economies, led by the US, continue to exhibit resilience in economic momentum and aggregate corporate earnings, many challenges persist for the China as they try to stimulate their economy.
The central bank in China, the PBoC has continued to do a significant amount of the stimulus to date and has been proactively lowering interest rates to help drive a more sustainable recovery. However, both household and business sentiment in China continue to remain weak. This is partly due to the aggressive corporate clampdowns in the March quarter of 2021, combined with the relatively high youth unemployment rate and their notably large property sector challenges.
Beijing is looking to become more innovative and recalibrate and adjust their policy mix to stimulate economic activity. Some longer-term reforms on first glance look pragmatic. This includes China rolling out several economic reforms to address structural issues, including reducing reliance on exports, promoting domestic consumption, and improving their business environment.
However, in the shorter term it has proved difficult to attract global investors for long duration investments. This is clearly a critical area they need to address and the recent open dialogue with US officials is an early and welcomed sign of some commitment to resolve many different trades issues.
Within the broader APAC region, Japan, India and the South-east Asia region (including Australia) will continue attract investors as China works through their reforms.
We continue to maintain underweight exposure to China and an overweight to South-East Asia and Australia. A focus on earnings that export to China continues to be our preferred investment strategy as they clows look at additional stimulus going forward. The portfolio cash position is marginally higher at 7.8%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/202772060.pdfMay, 2023
The K2 Asian Fund returned -1.34% for the month to be flat (+0.1%) year-to-date (YTD) in a volatile market. The investment outlook with the APAC region continues to exhibit some unevenness across economic momentum and the earnings outlook.
The largest surprise has been the slowdown within China, the second largest economy, so soon after a very robust reopening. The slowdown in the various partial economic indicators for China has been a surprise given the previous strong tailwind associated with their reopening trade from last year. Within the South-East APAC region, it is a little different as there is some resilience to economic momentum despite the tighter monetary conditions. There is a clear global slowdown underway which is the clear result of restrictive monetary conditions within many economies as they address the stubborn, but falling, inflationary conditions.
Despite the slowing momentum, corporate earnings have not slowed as much as anticipated and have surprised expectations. This resilience in corporate margins (aggregate) imply that the slowdown ahead will not be as bad as previously thought. Markets are simply looking through this slowdown, or shallow recession in some regions, and pricing the recovery in 2024 and beyond.
The key challenge within our region will be the outlook for China. Unlike other key economies they have been cutting rates and do not have a severe inflation problem. Despite the PBoC cutting rates for well over 18-months, the slowdown in activity is concerning. Once Beijing adjust their policy mix and get through their property market correction and address the very soft business and consumer sentiment, they will be better placed to drive more sustainable but lower economic growth rate.
The largest beneficiary of the slowdown in China economic momentum following their extended lockdown policy is the re allocation of investment towards the South-east Asia region (including Australia) and Japan. We continue to maintain underweight exposure to China and an overweight to South-East Asia, Australia and NZ. A focus on earnings that export to China continues to be our preferred investment strategy. The portfolio cash position is 4%.
File:April, 2023
The K2 Asian Fund returned +0.26% for the month to be +1.43% year-to-date. Market conditions within the APAC region continue to remain mixed which has been reflected in the uneven nature of partial economic indicators and the differences in the policy response. The global backdrop year-to-date can be summed up as resilient vs previous expectations for a deep economic recession.
While conditions are slowing, aggregate corporate earnings have not slowed as much as anticipated. Companies are trying to protect their margins and prepare for the upcoming economic recession. To date the slow down is not as severe as expectations six months ago. Consensus expectations for the downside to earnings for 2023 have improved but will still be negative (circa minus 8-10% range) for 2023. This is off a higher corporate earnings base in 2022 and also reflects the ability for the corporate sector to pass on higher prices to date to consumers. The tight labour market has helped. There are plenty of challenges ahead, particularly the stubborn services inflation which will imply monetary policy will remain restrictive. Higher rates for longer combined with ongoing quantitative tightening will lead to additional contraction ahead, particularly the price credit market. Looking through the second half 2023 contraction, markets are pricing in the 2024 recovery profile.
The challenges will continue to be the policy response to address inflation. The second largest economy, China has a different set of challenges. The PBoC has been cutting rates for well over 18-months and they do not have the same inflation concerns as many other key developed markets. However, they are dealing with a notable slowdown in economic activity compared to expectations and the consequences of their property sector correction. Never-the-less, the ongoing opening of their economy will continue to assist cushion the downside risks to global growth as their economy increasingly relies on domestic demand as a larger contribution to growth.
The largest beneficiary of the extended China lockdown policy in recent years is the re direction of global investment into the South-east Asia region and also the Japanese equity market. We continue to maintain underweight exposure to China and an overweight to South-East Asia, Australia and NZ. A focus on earnings that export to China has been our preferred strategy for the China reopening trade. The portfolio cash position is just above 5%.
File:February, 2023
The K2 Asian Fund returned -1.48% for the month outperforming the index by +0.53%. Following recent strong performance, global markets consolidated as investors continue to digest the weekly global data flow for signs of improved inflation signals to better understand the interest rate outlook. Economies in the west continue to navigate the stubbornly high inflation outlook.
Good signs continue via various data points that reinforce "goods" inflation continues to fall. However, the services portion of inflation remains too high for central bank policy makers. The tight labour market has effectively supported the services side of the economy and as a consequence, wage indicators have remained elevated and a concern for policy makers. Given the higher for longer inflation outlook, central bankers - led by The Fed - will continue to remain hawkish with their commentary. The alternative of tolerating higher inflation is very sub optimal for investors, the corporate sector and households. A delayed response to inflation implies a much higher unemployment rate, contracting economic conditions and negative earnings and credit conditions. Economic conditions within China are on a different trajectory compared to other key economies. While the China re opening narrative has been mixed, the economic momentum continues to improve in aggregate. China domestic demand will continue to be a larger portion of China GDP.
Further, the inflation rate in China is notably lower compared to most of the world allowing their central bank - The PBoC - to remain supportive and stimulatory. Concerns in China remain with regard to the property correction and finding a reasonable resolution. This includes some government and PBoC support for funding. The aim is to improve bad and doubtful debt provisions and attract additional funding to try and improve investor sentiment. While Beijing has worked to improve internal capital flow, the key concern is the ability for China to attract long term global capital. While some short term investments are occurring, many global pension funds continue to lower their duration investments on mainland China. This has further supported the South-East Asian region as a notably alternative for investors. We continue to maintain underweight exposure to China and an overweight to South-East Asia, Australia and NZ.
File:January, 2023
The K2 Asian Fund returned 5.96% for the month outperforming the index by +2.15% in January. The equity market rally reflects markets are more comfortable that the downside risks in 2023 will not be as bad as previously thought. The key economic data updates in recent months have continued to show evidence of improving economic conditions versus previous expectations of a hard recession.
The improvement in expectation is reinforced by the resilience of key developed market economies despite the tightening in monetary policy. Hence the market volatility has subsequently fallen. In particular, the resilient labour market conditions and the continued lower inflation inputs from recent highs have been key drivers in the recent rally. The higher cash rates are creating the required demand destruction and economic pain that the central banks have been targeting which has led to the lower inflation prints. Although it is notable that the services inflation is stubbornly high the goods inflation is falling.
The repricing of the downside risks has also been evident in the better earnings outlook in the US (aggregate) downside. Credit conditions have also remained in good condition despite the slowdown and impairments remain at near cycle lows. While there is more tightening to come from global central banks they are slowing the pace of rate hikes as we approach peak cash rate cycle. In anticipation, long bond yields continue to fall maintaining the yield inversion.
The continued fast track opening of the China economy following years of persistent lockdowns will be a net positive for global growth this year. There is targeted stimulatory policy and the internal economic activity in itself will be a key economic driver for the worlds second largest economy. The recovery of the China economy will also benefit key EU based economies companies that are correlated. Also, the targeted support for their housing sector from funding rates to developer support has gone a long way to assist in improvement of sentiment. Importantly, South-East Asian economies and companies are beneficiaries of global trade. We continue to maintain underweight exposure to China and an overweight to South-East Asia, Australia and NZ. The portfolio cash position is around 10%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/196410307.pdfDecember, 2022
The K2 Asian Fund returned -4.17% for the month. Markets were broadly weaker in December following strong gains from the one-year lows in October. A combination of compelling valuations combined with the prospect that US cash rates will not rise as high as initially anticipated by bond markets were key drivers for the risk on sentiment to help drive equity markets higher from September to early December. Further, consistent early signs of lower inflation inputs from PMI surveys indicated that the worst of inflation is now behind us. We view 2023 as a less volatile year compared to the previous year. There appears to be more predictability with regard to monetary policy and the slowdown in economic conditions and earnings has been priced in. There will be challenges however the US labour market, households and corporates remain in reasonable condition despite the rapid rise of the Fed Funds target rate to 4.25%-4.5%. There is a degree of resilience to the world's largest economy which will position their economy well to deal with the earnings and economic downgrades later this year.
Looking through 2023 we believe current valuations remain reasonable. A Fed Funds target rate of 5%-5.25% is our core view with a low in the earnings cycle in the September quarter. The opening up of the China economy following years of persistent lockdowns will be a net positive for global growth this year. The pathway for the second largest economy coming back online will not be a smooth transition however it will be a good contribution to global trade and economic activity as global growth conditions slow. Markets also anticipate some additional fiscal and monetary policy stimulus in China this year. This will be supportive for South-East Asian economies and European based companies that are beneficiaries of global trade. While the China stimulus is at odds with other economies, this desynchronisation in policy will ultimately cushion the downside of global growth given the tighter policy settings for other key economies such at the US, Europe and the UK. We continue to maintain underweight exposure to China and an overweight to South-East Asia, Australia and NZ. The portfolio cash position is around 14%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/195526890.pdfNovember, 2022
The K2 Asian Fund returned +4.35% for the month as global markets continued to rebound from recent lows. Peaking US bond yields combined with some lower inflation inputs have been positive combined with China finally reopening their economy. The recent market rally needs to be put in context as performance year to date has been very volatile following the most aggressive US Fed interest rate hike cycle since the early 1980's impacting developed and emerging markets. Risks will persist as there will be some lagged effects from recent rate hikes impacting the global economy well into next year. The tighter monetary policy has been effective.
There have been clear signs of demand destruction in many global economies. However, the worst of the restrictive policy appears to be behind us. The Fed commentary will remain hawkish. This will be at odds with softening signs of economic activity. The Fed simply needs to be convinced the inflation threat is addressed. Despite their commentary US bond markets are beginning to price in a 5.25%-5.5% Fed Funds Rate and the long bond yields are already starting to fall from their highs earlier this year. The cure inversion is currently suggesting that the tough Fed narrative of further rate hikes may not eventuate. Importantly, the opening of the economy in China will be a key contribution for global growth in 2023 and positive for the broader APAC region.
The best form of stimulus is simply allowing economies to reopen. This should lead to the long overdue repair of the very weak consumer and business sentiment in China following such aggressive lock down polices. There will need to be some well-coordinated and targeted fiscal and monetary policy to assist with the recovery in China. Many challenges persist, including dealing with their significant property impairment challenges and the supply chain constraints due to the extremely long lockdown.
We continue to maintain underweight exposure to China and an overweight to South-East Asia, Australia and NZ. The portfolio cash position is 15% at month-end. Some of the best performing holdings for the month include BHP, Judo Capital, JP Morgan, Macquarie and Samsung.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/193188161.pdfOctober, 2022
The K2 Asian Fund returned +0.82% for the month compared to -2.94% for the index outperforming by +3.76%. It has been undeniably a volatile year to date as markets have continued to adjust to the persistent and robust pace of tighter monetary policy from the developed economies and many South-East Asian economies while the central bank in China, the PBoC, has continued to stimulate due in part to their persistent and strict COVID lockdown response. Locking up the second largest economy for such a long period has continued to create many pressure points for their trade partners, broader China economic activity and their consumer and business sentiment has been impacted. This is further amplified by the large and growing impairments in the China property market. With the US Fed approaching a pause in their very aggressive rate hike cycle over the next six months there may be some additional relief for global markets. The strength of the USD compared to the Yen, Yuan, EUR and GBP has been aggressive and swift. A pause in USD strength would be supportive for risk assets going forward. Looking forward in China, they have now settled post the recent October Party Congress Meeting which effectively delivers the new high-level bureaucrats for the next five years.
There are many concerns that will need to be addressed. Coordinated fiscal and monetary stimulus, addressing their property concerns, rebuilding confidence and opening up their domestic economy to internal travel will all be positive. Ending their strict COVID response would be a very strong stimulus boost for their domestic economy. Getting there looks more problematic. We continue to maintain underweight exposure to China and an overweight to South-East Asia, Australia and NZ. The portfolio cash position is 16% at month-end. Unlike other global funds we maintain a higher cash position for the Asian Fund. Some of the best performing holdings for the month include Stanmore Resources, JP Morgan, Samsung and Woodside Energy.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/192319393.pdfSeptember, 2022
The K2 Asian Fund returned -8.68% for the month in another volatile month. Global equity markets have had a difficult year and markets remain volatile and the uncertainty persists. The US Fed increased the Fed Funds rate by a further 75 basis points at the FOMC Meeting in late September. This now takes the rate to a restrictive 3%-3.25% target (lower and upper band). Interestingly the pace of US rate hikes in the current cycle have now increased at a faster pace compared to the previous aggressive rate hike periods of 1994 (Greenspan) and 1983 (Volker) periods. The commentary from the Fed Chair and various other committee members on US monetary policy, have continued to reinforce their hawkish comments. This is a clear challenge for investor sentiment
Their aim is to slow down the pace of activity to deliver the required demand destruction with the aim of addressing inflation risks. The pace of the slowdown year-to-date has been painful and felt by the market performance including defensive asset classes such as fixed income. Inflation risks look set to persist despite the view that peak inflation is behind us Getting core inflation back towards the 2%-3% targets in many western economies remains a challenge. Pricing in rate cuts remains pre-mature and the record low "near zero" rate settings of the recent past will not return anytime soon. The China slowdown has been the key stand out over the past year. The downgrades have been both larger and quicker than the market contemplated. The central bank in China, The PBoC, continues to lower rates to stimulate however there needs to be a fiscal stimulus program to contemplate the accommodate monetary policy.
The best opportunity to get the Chinese economy accelerating looks to be post the October Party Congress Meeting which will deliver some much needed certainty to their five-year economic plan combined with opening up their domestic economy from their lockdown strategy. The portfolio cash position is 11.5% at month-end compared to 18% 3-months ago. Unlike other global funds we maintain a higher cash position for the Asian Fund. Some of the best performing holdings for the September quarter include Summerset, Kina Securities, Stanmore Resources and Airports of Thailand.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/191324301.pdfAugust, 2022
The K2 Asian Fund was flat for the month and +2.8% for the current financial year (+2.75% compared to the index). Financial markets continue to exhibit ongoing volatility due in part to some uncertainty with monetary policy settings going forward. The direction of interest rate settings and the ongoing quantitative tightening (QT) in the US has some obvious implications for valuations and investor sentiment globally. Markets are always searching for additional clarity. The commentary and guidance from the Federal Reserve needs to be reconciled with the underlying economic data to better understand future policy settings and risks.
The economic momentum has continued to slow in China, impacting global economic activity. We anticipate that following the 20th China National Congress in October, there should be some notable coordinated policy stimulus from both the PBoC and Beijing. While it is reasonable to suggest that peak inflation is behind us, getting core inflation back towards the 2%-3% targets in many western economies looks some way off. Inflation may be falling in the year ahead however it looks likely it will remain elevated compared to long run averages. This suggests that cash rates will be restrictive for a short period ahead and investors will need to be comfortable that markets will not see sub 2% cash rates anytime soon. The ultra-low near zero rate settings of the recent past will be viewed going forward as sub-optimal policy with the benefit of hindsight. Despite the higher rate outlook in the west and lower in China, aggregate US corporate earnings and credit conditions remain positive (but slowing), household savings remain high (however falling from cycle highs) and the labour market remains strong. The uncertainty remains going forward however we anticipate cash rates to peak by year-end. This should be supportive for the economy and earnings outlook.
The portfolio cash position is lower at 13.6% at month-end compared to 17.8% a month earlier as we take advantage of compelling valuations in August to reinvest additional cash. Unlike other global funds we maintain a higher cash position for the Asian Fund. Some of the best performing holdings for the Fund this month were Macquarie Group, News Corp, Ryman Healthcare and Intercontinental Exchange.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/190428277.pdfJuly, 2022
The K2 Asian Fund returned +2.9% for the month outperforming the index by +4.9% in July. The market recovery in July followed a volatile June quarter. Some additional clarity on earnings and underlying economic conditions, combined with cheap valuations, helped to improve investor sentiment. Looking forward there will still be some uncertainty with regard to the pace of tighter monetary policy. The monthly flow of economic data will continue to help markets build a better picture of the economic and earnings momentum.
Despite the tighter monetary policy by many global central banks, the pace of earnings growth and the tight labour market remain robust. They do not exhibit recessionary levels as some other indicators suggest, such as consumer sentiment. The ongoing uncertainty for markets regarding the pace of US rate hikes will remain as markets look for some confirmation for peak inflation in the second half of the year. The economic challenges to China persist due to their sharp housing led slowdown that has been a challenge since 2020. Further, their rolling lockdowns this year have added to the notable slowdown in broader activity. Markets will look for some fiscal led solution from Beijing combined with the already stimulatory monetary policy from the Chinese central bank (PBoC) which has already cut rates and delivered additional stimulus this year. More coordinated stimulus is required for the world's second largest economy. Further, the continued geo-political tensions between the west and China are not conducive for investor sentiment. Broadly, valuations within the APAC region are well below historical benchmarks and continue to offer value. The region (particularly the South-East Asian region) will continue to be the beneficiary of additional capital investment in the years ahead as global trade begins to accelerate. While risks remain including inflation expectations, the ongoing supply chain disruptions, increasing corporate costs and geopolitical risks there are some notable positives. Lower energy prices, corporate credit conditions, earnings momentum, household savings ratio and a robust labour market in the developed economies are supportive.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/asian-arf-final_1660536168.pdfJune, 2022
In a volatile global equity market in June, the K2 Asian Fund returned -9.54% for the month. The first half 2022 performance in global equities was one of the worse in many decades as markets continued to adjust to the uncertainty with regard to the pace of tighter monetary policy combined with slowing economic momentum. The US Fed has increasingly signalled to the market the need to increase rates rapidly from the historical lows seen in 2021. The heightened uncertainty for markets year-to-date remains primarily with the slowing economic pulse, rising inflation expectations and the aggressive forecasts of higher US cash rates. As the US continued to deliver tighter monetary conditions the Chinese central bank (PBoC) continued to cut rates and delivered more stimulus following the rolling lockdowns through China. We anticipate addition China stimulus following the greater than expected slowdown in economic growth so far this year. It is a unique circumstance whereby the US, Europe and many other G20 economies are raising cash rates while China continues to cut rates.
The subsequent increase in market volatility and the prospect of a US recession has weighed on sentiment within the APAC region whereby valuations have now become very compelling compared to long-run historical benchmarks. The discount to the price of future earnings has been very aggressive this year and we believe this is overdone. The downgrades to China economic growth forecasts have been severe following the regulatory driven slowdown to their corporate sector in 2021 combined with the property sector stress and the ongoing China lockdowns. This impact implies China GDP for 2022 will be in the mid 3% levels which is a notable downgrade form the 5.5% forecast for the same period just six months ago. Without doubt, additional China fiscal and monetary stimulus will be required. Further, some relaxation of global tariffs will partially assist.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/asian-arf-final_1658103615.pdfMay, 2022
The K2 Asian Fund returned -1.94% for the month. Global market volatility continued for the month. Uncertainty for global markets year-to-date remain primarily with rising inflation expectations and the need to raise US cash rates more aggressively vs market expectation. The Feds communication is important for guidance for markets, and it has become very clear in recent months that they need to address the risk of core inflation getting out of hand whereby becoming a policy dilemma.
The uncertain economic outlook remains for China as economic activity continues to slow following the rolling recent lockdowns, however, it is notable that they are one of the few large economies that are cutting interest rates. The stimulatory policy settings in China remain a positive backdrop for a recovery in activity towards year-end and should be supportive for the APAC region. Unlike the policy settings in China, the US economic slowdown is driven by tighter policy settings. The Fed is on track to continue to raise the Fed Funds Rate at each of the FOMC Meetings this year with markets anticipating cash rates rising to above 3%. This will assist in creating the required slack in the economy and help address the stubborn inflation concerns. However, it will also lead to the market beginning to price in the start of the next rate cut cycle. Early 2024 looks possible.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/asian-arf-final_1655344982.pdfApril, 2022
The Asian Fund returned +0.12% for the month. The fund has maintained an underweight exposure to China since early 2021 and is ahead of the index year-to-date (YTD) by +1.0%.
Uncertainty for markets continued due to rising inflation expectations and the implications for US rates. Central bank communication is important for markets and the US Fed has continued to reinforce tighter monetary policy settings ahead from the recent historical lows in rates. This follows their pivot in late 2021 as inflation risks continued to build. In addition to higher US rates, the Quantitative Tightening (QT) will also have an impact for global markets. While addressing inflation risks the US Fed ultimately aims to engineer a soft economic landing.
The positives include the current economic and earnings momentum remaining above long run historical benchmarks (although slowing), compelling equity valuations, sound corporate credit conditions, high household savings rates and the strong labour market. The strong wealth effects create some comfort for policy makers that the tighter monetary policy can be absorbed. The risks include ongoing supply chain bottlenecks, China slowdown, increasing corporate costs, persistent inflation, quantitative tightening (QT) and the ongoing geo-political concerns due to the war in the Ukraine.
The ongoing lockdowns in China, while difficult to reconcile, clearly adds to worsening global supply chain disruptions. Eventually when their economy opens up again, they will need to resume accommodative policy settings which will include further PBoC rate cuts and lowering of their reserve ratios combined with large fiscal stimulus from Beijing. This should be supportive for global growth later this year.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/select-arf-final_1652674395-1.pdfMarch, 2022
The Asian Fund returned -2.69% for the month vs the index of -3.26%. The outperformance for the month is in part due to the underweight in China. The fund is also ahead of the index year-to-date (YTD) by +1.0%. Markets globally continue to adjust to the expectation of additional rate hikes from the US Fed to address the persistent inflation concerns. In addition to the higher US cash rate outlook, the long overdue start to Quantitative Tightening (QT) has begun. The US Fed ultimately aims to engineer a soft economic landing while balancing the various risks.
The positives include the current economic and earnings momentum remaining above long run historical benchmarks (although slowing), compelling equity valuations, sound corporate credit conditions, high household savings rates and the strong labour market in developed economies. The strong wealth effects create some comfort for policy makers that the tighter monetary policy can be absorbed. Further, in the early rate hike stage of the economic cycle, equity earnings (in aggregate) and commodities tend to benefit.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/asian-arf-final_1649896560-1.pdfFebruary, 2022
The Asian Fund returned -1.1% for the month vs the index of -3.61%. The +2.56% outperformance is in part due to the underweight in China. The fund is also ahead of the index year-to-date (YTD) by +0.48%.
Global equity markets continued to remain volatile during the month. The market is adjusting to the upcoming interest rate rise in March by the US Federal Reserve (FED), the beginning of the long overdue quantitative tightening (QT) by The Fed, the ongoing inflation concerns and of course the disturbing and unfortunate events in eastern Europe following the invasion of the Ukraine by Russia. The uncertainty for markets and the implications for energy prices are anticipated to persist. For now, these geo-political concerns will dominate headlines and therefore investor and consumer sentiment.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/asian-arf-final_1646961847.pdfJanuary, 2022
The K2 Asian Fund returned -3.52% for January. Over the long term the fund has delivered +8.28% p.a. over 22 years (after all fees). Following a strong end to 2021, Asian equity markets started the new year full of renewed optimism. This was quickly short lived as investors fretted about inflation and how central bankers would react. Discount rates were rapidly recalibrated and markets de-rated accordingly. All major regions suffered varying degrees of losses with Materials and Energy the only sector spared. Korea (-10.6%) and Mainland China (-7.7%) bore the brunt of the selling while Hong Kong (+1.7%) showed signs of a recovery, albeit off a low base.
Any good economic textbook will tell you that higher interest rates are needed to subdue inflation. However, life in the real world is not so straightforward and central bankers are acutely aware of the economic armageddon that will occur from even a slight increase in rates. While this is no doubt a problem of their own creation through years of loose monetary policy it is becoming increasingly difficult to tame the inflation beast without causing the associated collateral damage. In the US, bond futures are currently pricing four to five hikes in calendar year 2022 which we think is too aggressive.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/asian-arf-final_1644376286.pdfDecember, 2021
The K2 Asian Fund returned -0.51% for December. Over the long term the fund has delivered +8.48% p.a. over 22 years (after all fees). Asian equity markets experienced mixed returns in December. Korea (+4.9%) and Taiwan (+4.5%) were the standout performers while Hong Kong (-0.3%) continues to struggle. Ongoing regulatory uncertainty in Hong Kong is forcing investors to remain on the sidelines. To put the underperformance into perspective the Hang Seng Index has returned -14.1% for the 2021 calendar year. This compares to +26.9% for the S&P500.
More generally, investors were forced to grapple with the potential impact of Omicron and a hawkish pivot from the US Federal Reserve Bank. The market is now pricing three interest rate rises in the US over the course of 2022. With regards to Omicron, initially it was a fear of the unknown causing most angst, but as additional data gradually becomes available that fear is slowly subsiding.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/asian-arf-final_1641856518.pdfNovember, 2021
The K2 Asian Fund returned -5.2% for the November in a volatile month for equities in the APAC region. The fund has delivered +8.54% p.a. over 22 years (after all fees).
Asian equity markets experienced generally weaker returns in November. Taiwan (+2.6%) and mainland China (+0.5%) were the only countries to finish in positive territory while Hong Kong (-7.5%), Korea (-4.4%) and Singapore (-4.9%) significantly underperformed. Sentiment rapidly deteriorated in the last few days of the month with the emergence of a new Covid strain combined with an unexpected hawkish shift from the Federal Reserve. Removal of the word "transitory" and potential acceleration of the tapering program came as a shock to investors already grappling with the potential economic impacts of Omicron. With regards to inflation, this month we saw The Dollar Store raise prices by 25% to $1.25, the first price increase since it was founded in 1986. And anecdotally, according to the American Farm Bureau Federation, the average cost of feeding 10 people with turkey and trimming for Thanksgiving dinner has increased by 14% from last year. So, it came as no surprise to us that the concept of transitory inflation has been removed from the Fed lexicon. On the flipside however, right on cue, the threat of border closures and subsequent oil price falls might serve to dampen inflationary expectations in the short term.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/asian-arf-final_1639092288.pdfOctober, 2021
The K2 Asian Fund returned -0.97% for the month and is up +7.33% over the past year. Over the past 22 years the fund has delivered +8.84% p.a. return. Asian equity markets experienced mixed returns in October. Hong Kong (+3.3%) and Singapore (3.6%) outperformed while Mainland China (-0.6%) and Korea (-3.2%) lagged. After a volatile start to the month investor focus turned to US reporting season which in aggregate exceeded expectations once again. The market obsession with inflation shows no signs of abating as the world slowly becomes more comfortable with its persistence. This had led to an increase in yields on shorter-term bonds to reflect the potential for interest rate hikes starting in 2022. What impact this will have on future economic growth remains unknown however as the world continues to emerge from its Covid induced hibernation we expect consumer sentiment, buoyed by record levels of household savings, to remain elevated.
The wildcard is China. Despite local equity markets having stabilised, the threat of further regulation still exists. In addition, to the goal of achieving common prosperity and the associated casualties, it would appear that the Chinese authorities are orchestrating a slowdown with the intention of reducing pollution in preparation for the Beijing winter Olympics in February next year. Much like Russia and Sochi, with the eyes of the world looking on there is no room for error. Once completed and the torch officially handed over to Italy, the necessary clean air (pardon the pun) should exist for a swift re-acceleration of economic activity.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/asian-arf-final_1636428114.pdfSeptember, 2021
The K2 Asian Fund returned -4.09% for the month and is up +10.33% over the past year. Over the past 22 years the fund has delivered +8.92% p.a. return.
Asian equity markets declined in September as investors battled fires on a number of fronts. Ranging from the threat of more permanent inflation to the potential default of one of China's larger property developers. Following the FOMC meeting towards the end of the month, Chairman Powell once again re-iterated his timetable for tapering and unwillingness to raise interest rates in the short term. Despite no real new news being delivered the delayed reaction from bond markets caught investors by surprise. Yields on US 10-year bonds added a quick 20 basis points to end the month at 1.49%. This put immediate pressure on equites with the biggest impact being felt by long duration technology stocks that rely on low discount rates to justify their lofty valuations.
A less transitory inflationary environment is certainly starting to be priced by markets despite unrelenting table thumping to the contrary by the Fed. On one hand lumber and iron ore prices have fallen by -60% and -45% respectively from their peaks. While on the other hand oil continues to grind higher. However, for inflation to be sustained it will need to persist for years. Key indicators that we are closely monitoring include food prices and wage growth.
Meanwhile in China, the regulatory reset that unofficially began almost 12 months ago with the cancellation of Ant Group's US$37bn IPO claimed another set of victims this month. This time, and somewhat surprisingly, it was the Macau casino operators. Not only are they still recovering from Covid closures, they are large employers and pay significant amounts of tax. In addition, China Evergrande Group, a major property developer weighed down by US$300bn of liabilities, is hanging on by a thread. While on the surface it is business as usual for credit markets the risk of contagion is real.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/asian-arf-final_1631076930.pdfAugust, 2021
The K2 Asian Fund returned +2.69% for the month and +13.4% over the past year.
Asian markets experienced mixed returns in August as China's policy reset and associated uncertainty around which sectors might be next in the firing line has left investors licking their wounds. In contrast, their more developed global peers continued to move higher throughout as investors gained comfort with the Fed's tapering timetable and unwillingness to raise interest rates in the foreseeable future. Chairman Powell's Jackson Hole speech further re-iterated this position. With the likelihood of "policy error" diminishing, long duration technology stocks who require low discount rates for valuation support were the biggest beneficiaries. The great inflation debate appears to have taken a back seat but that is not to say it has gone away. Despite 10yr bond yields still remaining somewhat subdued at 1.30% indicating that any inflation will most likely be transitory, we believe it is being driven down by international investors who are attracted to yields greater than zero.
Positive contributor to fund performance included NZ listed aged care provider Ryman (RYM) and expanding Australian financial services firm MA Financial Group (MAF). MA Financial delivered a strong 1H result; profits were 93% higher than last year which enabled the company to lift full year profit growth guidance to 20-30%. RYM announced an 82% improvement in its 1Q cash receipts and acquired another site in Melbourne. RYM has rapidly established a strong foothold in Melbourne with a landbank of 12 sites. We envisage that over the next 5 years the value of RYM's Melbourne assets will surpass $4 billion.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/asian-arf-final_1631076930.pdfJuly, 2021
The K2 Asian Fund returned -4.5% for the month and has now returned +17.3% over the past year. Asian equity markets languished in July, lagging their global peers as Chinese regulators expand their reach beyond mega-cap technology companies. DIDI, China's version of UBER, along with private education providers felt the full force of authorities concerns leaving investors to speculate who their next target might be. When combined with China's more orthodox approach to monetary policy, markets in the region remain on high alert. We continue to monitor the situation carefully with a view to acquiring high quality companies at attractive prices that have suffered collateral damage.
Another strong US reporting season did little to alleviate Asian investor concerns. Despite 88% of companies beating on earnings, forward guidance commentary was more muted, if provided at all, dampening performance to a small degree. Reassuringly, the US Federal Reserve confirmed their position of no imminent tapering, further signalling their long-term support for markets and the economy. The ongoing debate around inflation appears to be shifting towards the FED's transitory corner as they attempt to define the meaning of the word. US 10yr bond yields closed the month down -24 basis points at 1.22%, potentially telling us that growth might be scarcer in the medium term. We believe it is more of a technical bounce dominated by offshore buyers who are attracted to yields greater than zero.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/asian-arf-final_1628465212.pdfJune, 2021
The K2 Asian Fund returned -0.5% for the month and +28.8% over the past year. The strong return for the fund over the past year reflects the recovery within the Asia Pacific region from the pandemic induced March 2020 cycle reset. There have been multiple contributing factors to the strong 2021 fiscal year performance. This includes a combination of good stock selection, investing cash early in the recovery and accumulation of the AUD at lower levels have all contributed to the strong performance.
Asian equity markets experienced mixed returns in June as investors digested the latest musing from the US Federal Reserve and their potential impacts on asset allocation. A tiny shift in rhetoric to indicate that interest rates may increase sooner than expected was enough to send bond yields down and the USD up as perceived less risky assets benefited. Helping to calm investor nerves, Chairman Powell in his speech to congress emphatically stated that rates will not be raised pre-emptively with any increase only happening when there is evidence of actual inflation. The case for transitory inflation largely driven by supply disruptions gained momentum as key food and materials prices such as lumber (-58%), corn (-7%) and Soybeans (-13%) have all declined from their May highs.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/asian-arf-final_1625712495.pdfMay, 2021
The K2 Asian Fund returned +0.55% for the month and has now returned +34.74% over the past year to be +4.9% ahead of the benchmark (BM). The Asian Pacific region has recovered strongly from the pandemic induced March 2020 cycle reset. The combination of good stock selection, investing cash early in the recovery and accumulation of the AUD at lower levels have all contributed to the strong performance vs benchmark since the severe March correction.
In spite of exponentially rising Covid cases, India (+6.5%) was the best performing market closely followed by mainland China (+4.9%). Tech heavy Taiwan (-2.9%) lagged. With Malaysia and Vietnam moving into periods of strict lockdowns we maintain a close watch for any impact on equity prices and contagion throughout the region. The AUD gained +0.29% to 0.7738. The fund is currently 80% hedged to the AUD providing capital protection against a rising AUD.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/asian-arf-final_1623224732.pdfDecember, 2020
The strong returns continued in December. The K2 Asian Fund returned +2.7% for the month and has now returned +21.7% this financial year to be +5.0% ahead of the benchmark (BM). Since the cycle lows in the March correction the fund is up +56% outperforming the BM by +22.4%.
The combination of good stock selection, investing cash early in the recovery and accumulation of the AUD at lower levels have all contributed to the strong performance vs benchmark since the severe March correction. Asian equity markets continued their strong performance through December in line with their global peers. US equities finished the year at record highs as investor embraced further fiscal stimulus from Washington. 2020 was a year main street would like to forget but for global investors it was extremely rewarding as even lower interest rates, additional quantitative easing and enormous amounts of fiscal stimulus provided overwhelming support for equities with Asia also reaping the benefits. As we go to print the Democrats appear to have gained control of the US Senate giving them a clean sweep.
On one hand this will likely lead to increased taxes and regulation while on the other hand significant fiscal spending is expected. The exponential increase in money supply has provided rocket fuel for asset prices. Since mid-March 2020 the Federal Reserve US Money Supply (M2) has risen by +20% which correlates to approximately 41 S&P 500 points for every US$100bn. Gains were broad based across all major countries. Korea (+10.9%) was the standout performer followed by India (+7.8%) then Taiwan (+7.4%). Hong Kong (+3.4%) and mainland China (+2.4%) were the relative laggards, dragged down by the announcement of an investigation into monopolistic behaviour by Alibaba and the associated negative spill over effect.
Recently increased weightings to the Financials sector has continued to benefit the portfolio. Major positive contributors within the sector include Summerset Group Holdings (NZ) (+18%) and AIA Group (HK) (+12%). The fund also benefited from its long term core Resource holdings with large gains recorded for the month from Fortescue Metals Group (+29%), Rio Tinto Group (+12%) and BHP Group (+11%) driven by the strong rise in iron ore which rallied 30% in December. The Fund's net exposure currently sits at 96%. The fund remains optimistically positioned as we continue to position the portfolio to benefit from a more reflationary environment as central banks continue unabated.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/asian-fund-final_1610426295.pdfasset_class: Foreign Equity
asset_category: Long Short
peer_benchmark: Foreign Equity - Long Short Index
broad_market_index: Developed -World Index
manager_contact_details: Array
ticker: KAM0100AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://investmentcentre.moneymanagement.com.au/factsheets/mi/n8y4/k2-asian-absolute-return
Provider’s Own Factsheet
fund_features:
K2 Asian Absolute Return aims to deliver superior risk adjusted returns through the investment cycle. Our target return is 10+% p.a. over the long term. We actively invest in equities when growth opportunities exist to generate positive returns for our clients, and aim to protect these gains when market conditions change.
structure: Managed Fund