“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair” – Sam Ewing
Haircuts and currency swings defined April. The Japanese yen hit a level last seen in 2002 while the Chinese yuan depreciated almost 4% in the month. There were manifestations of US dollar shortages even before quantitative tightening by the Fed. Markets now collectively believe that central banks are behind the curve. Risk-aversion prevails.
The fund clawed back some relative performance during the month amid what has been a difficult year so far. The sharp rise in interest rates led to a de-rating of several growth companies in our portfolio, some of which we trimmed. Exposure to Indonesia and Philippines helped. While we were too early in reducing exposure to Taiwan, that action finally seems to be coming right.
We admit that adding to our China exposure might appear somewhat foolhardy. President Xi Jinping and the Politburo radiate confidence bordering on arrogance around their ‘Dynamic zero COVID’ policy. A simplistic view is that the Chinese authorities remain stuck in their ideological and political straitjacket, refusing to believe in science or learn lessons from the West. However, when seen from their point of view, a low vaccination rate, lower efficacy of the Chinese vaccines and sub-par healthcare infrastructure across a mammoth population probably leaves no alternative.
Lockdowns are certainly damaging livelihoods and economic growth. As Chinese stocks sell off, the dispassionate end of our analysis sees little option for the authorities to do something other than loosening policy. If declaring its strategy in dealing with COVID as ‘better than the West’ is important to the Chinese leadership, then so too will be its desire to show how much better its economic decision-making is. In Asia, risk perceptions are highest around stocks in China (for good reason). Valuations are cheap, though by itself that is not a sound argument. On an absolute basis, we find value, while on a relative basis, even compared to the rest of the world, stocks in China are worth the risk. If any government has the room and the ability to reflate, in our view it is truly only China.
Samir Mehta is manager of the JOHCM Asia ex Japan Fund. Learn more about the fund here.
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