Whether Donald Trump’s ultimate aim is short-term appeasement of US voters or longer-term containment on China, the risks are already priced into markets, and opportunities are arising , according to Mark Williams, who co-manages the Liontrust Asia Income fund.
The high-level game of brinkmanship between the two superpowers has gone further than many had anticipated.
The latest development saw the US president postpone the implementation of $156bn in tariffs until December, although $111bn will take effect from September, as previously planned.
“The fact that Trump views the delay as a positive for consumers suggests that he does in fact understand economic theory so far as the flexibility – or elasticity – of demand for a product determines whether the burden of import tariffs falls on the good’s provider – in the form of lower demand – or on the consumer via higher prices,” said Williams.
“This same principle has allowed us to assess instances where trade wars news flow has led to Asian stocks being oversold.”
The Asian equity manager said it is just the latest instalment of the ongoing saga, which has inspired thee large bouts of weakness over the past year, although the MSCI AC Asia Pacific index remains “pretty much flat” in sterling terms.
While the Chinese and Hong Kong holdings of the £109m Liontrust Asia Income fund – which Williams manages alongside Carolyn Chan – have been impacted by the trade war developments, it hasn’t been in the way that many would expect.
“Because tariffs have been threatened for much longer periods than they’ve actually been wielded, they’ve had a much bigger impact on investor behaviour than on company sales and earnings,” he explained.
“As a result of the trade wars rhetoric, the fund has been up against a headwind of risk-averse behaviour – a headwind that it has been able to push through due to decent returns from stock selection, meaning that the fund is a little ahead of the regional index over the year.”
Performance of fund vs index over 1yr
Source: FE Analytics
Over the past year the Liontrust Asia Income fund has made a total return of 3.38 per cent against a 0.16 per cent rise for the MSCI AC Asia Pacific ex Japan index, as the above chart shows.
Nevertheless, investors have looked to shift into areas that provide havens from negative trade developments, the manager said.
This has driven up valuations of developed markets in the region such as Australia and defensive sectors like real estate investment trusts (Reits), which have further benefited from the ‘bond proxy’ status, and large-cap stocks.
However, these flows have been detrimental to the fund, which is relatively overweight small and mid caps and underweight Australia, with minor Reit exposure.
Performance of indices YTD in US dollar
Source: FE Analytics
“While it might seem tempting to increase our Australian exposure to negate these relative headwinds, we don’t think this is the best way to achieve the fund’s investment mandate,” he said.
“We are looking for companies whose earnings and dividend growth profile is reflective of the region’s economic development, not mature developed market stocks that could as easily be listed in London as Sydney.”
While investor behaviour has been a headwind to performance, Williams noted, the underlying corporate environment has been relatively benign.
“The Q2 earnings season provided the usual mixed-bag for our portfolio of stocks – a variance in fortunes which we expect over such a short time period,” he said.
“But there was nothing to suggest that investors should be running for the hills due to trade wars, even if the prospect of ‘macroeconomic uncertainties’ now seems to be a standard-issue insert for companies’ outlook statements.”
The portfolio manager strives to avoid the herd mentality: “Where other investors have perceived that stock valuations are fundamentally undermined, we have in a number of instances been able to take a view against the market to the benefit of the fund.
“The Taiwanese stocks held in the fund are a great example of this.
“Alongside our holdings in Thailand, these have contributed the majority of the fund’s positive stock selection effect over the last year.
“As technology stocks with Chinese manufacturing sites, the Taiwanese companies have been viewed as clear losers from tariff imposition, triggering double-digit share price falls in last year’s first tariff sell-off.”
The team’s analysis suggested that share price falls for all the stocks owned in Taiwan had significantly overestimated the trade risks.
“We therefore added to all of these positions,” said Wiliams “Over the last year, this one exercise contributed a substantial proportion of the fund’s positive attribution.
“King Yuan Electronics, Lite-On Technology, Lotes and Wistron are among the stocks to deliver double-digit percentage contributions.”
Opportunities continue to emerge as a result of the latest tariff-driven sell-off, including one of its most recent additions to the portfolio.
“In July we were able to buy up shares in a new stock – Merry Electronics – at levels almost 20 per cent below their 2019 highs,” he said.
The Taiwanese headphones and speakers specialist has experienced rapid growth in sales of true wireless stereo headsets.
“We do not think tariffs will significantly impinge on Merry Electronics’ ability to exploit this booming demand,” the Liontrust manager added.
“While it does have manufacturing operations in China, it also operates out of Thailand and Singapore. More importantly, demand for stereo sound in Bluetooth earphone buds is likely to prove relatively price-elastic, so consumers will probably be willing to foot the bill for any tariffs incurred.”
Chan and Williams target a prospective yield at least 1.1x that of the Asia Pacific ex Japan markets and long-term capital appreciation through an investment process that aims to identify key drivers for the region, identifying the likely winners and losers of those drivers, fundamental stock analysis and portfolio construction.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
Since launch in March 2012, the Liontrust Asia Income fund has made a total return of 88.90 per cent compared with a 78.83 per cent gain for the IA Asia Pacific Excluding Japan peer group and a 77.31 per cent return for the MSCI AC Asia Pacific ex Japan benchmark.
The fund has a yield of 4.55 per cent and an ongoing charges figure (OCF) of 0.97 per cent.