Chinus Asset Management selected by Eurekahedge for October Manager Profile

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We are delighted to report that Eurekahedge has selected Chinus Asset Management for its monthly manager profile for October.  In the past, Eurekahedge has only profiled hedge fund managers.  This is the first time they have profiled a fund of funds manager.  As Eurekahedge CEO Alexander Mearns remarked during his interview with Charles Mautz earlier this month in Singapore, “You’re [Chinus Asset Management] not only outperforming most Asian fund of funds, you’re also outperforming most Asian hedge funds.  Most Asian hedge funds would be quite envious of your return profile.”  To watch the interview, please click here.  Eurekahedge is leading global database of alternative asset funds.

Chinus Investor Trip to China

A group of 15 investors joined us on a 12-day trip to China this month.  We traveled to Beijing, Shanghai and Hong Kong to meet with our managers and visit their portfolio companies, as well as experience China’s cultural and culinary highlights. 

Business highlights included:

  • Receiving economic and investment briefings from Chinus managers.  We learned how they are finding investment opportunities in consumer and new economy companies that are experiencing high growth but trade at attractive valuations.
  • Visiting portfolio company iFLYTEK’s showroom to see applications of its voice recognition software in cars, entertainment systems, appliances and intelligent controls.  iFLYTEK has achieved over 40% annual revenue growth over the past five years and counts BMW and Samsung among its clients.  Its GM told us that they expect revenue to grow substantially faster over the next three years as the “Internet of Things” takes off.
  • Meeting with Chen Qiyu, Chairman of Fosun Pharma, one of China’s leading healthcare companies to hear their growth strategy.

Cultural highlights included:

  • Private tour of the newly restored former residence of Emperor Qianlong of the Qing Dynasty inside the Forbidden City.
  • Meeting with acclaimed fashion designer Han Feng at her studio in Shanghai where she discussed her creative philosophy and previewed her latest clothing line.
  • Farewell reception and dinner at the China Club in Hong Kong hosted by Pete Nickerson with his honored guests Liu Mingkan, formerly the first Chairman of the China Banking Regulatory Commission and Chairman and President of Bank of China, and Jon Dolfin, a renowned Tibet scholar.

After the trip, investor Carl Christoferson commented:

We witnessed firsthand the exuberance, economic drive and immensity of China and its people.  There are approximately 400 million hungry millennials driven commercially to consume which means they want to learn and earn to support this hunger.  Even though the economy has, as you have read, materially grown over the past decade I believe there is significantly more growth to be realized.  Retail rules in the big cities.  Their ability to accomplish things quickly is dazzling.  They are a “can do/will do” society.  Their commercial/retail streets and Alibaba (a hybrid of Amazon and eBay) are selling products and services at world record levels – we saw and experienced it – it’s a frenzy.  All the commercial questions I asked were addressed rationally (real estate bubble, corporate debt levels, slowing economy, sustainability and pollution initiatives, etc.…).

We believe it is incredibly valuable for people to travel to China and the rest of emerging Asia to see for themselves what is going on.  It is a different world than what is portrayed in the press.  We are planning to organize similar trips to India and SE Asia. 

Investors Look To Emerging Asia For Returns

Emerging Asian markets have continued to rise in August, particularly China.  Investor sentiment towards emerging Asia has improved markedly since Brexit occurred in June.  This marks the first time since we formed Chinus Asset Management in 2008 that investor sentiment towards emerging Asia improved following a global macro crisis.  As the Wall Street Journal reported last month:

Emerging markets aren’t a haven—but they look like a compelling alternative to the bigger concerns that still lie in developed markets.  One month after the Brexit vote, and one week after the Turkish coup attempt, emerging markets show no signs of flagging. In fact, the surprise success story of the year appears to be gathering momentum…  What were headwinds for emerging-market investors are turning into tailwinds. 

Investors have pumped close to $13 billion into emerging-market stock funds over the past six weeks.

 

As a result, emerging market valuations have been recovering from near record lows at the beginning of the year.  They are still substantially less expensive than developed country valuations.

In a world starved for returns, emerging Asia is one of the few regions with both rapid economic growth and attractive valuations. 

China: As the “Emerging Destination” chart in the Asius section above shows, investors continue to be wary of China even as they rush into other emerging markets.  We, on the other hand, have a contrarian view and are bullish on China.  Our outlook is based on several factors:

  • Our managers in China have relatively high earnings growth forecasts for their portfolio companies for 2016 that have not yet shown up in the stock prices.  If their portfolio companies achieve 20-50% earnings growth, as our managers forecast, then stock prices will experience similar gains, assuming valuation multiples remain constant.
  • Chinese market valuations are rebounding off of historic lows but still very attractive.  MSCI China (which primarily track Chinese companies listed in Hong Kong) trades at 11.2x while the CSI300 (Shanghai index) trades at 12.6x.  There is room for multiple expansion as valuations revert back to mean.  
  • The Chinese government announced that the Shenzhen-HK Stock Connect program will begin in Q4.  Foreign investors will have access to 673 Shenzhen-listed companies with total market cap of $1.9 trillion.  Chinese investors will get access to an additional 120 small cap stocks listed in Hong Kong with total market cap of $227 billion.  When the Shanghai-HK Stock Connect program was initiated in late 2014, both onshore and offshore markets surged.  
  • Access to Shenzhen stocks is one of the key remaining hurdles for A-share market inclusion in MSCI indexes.  Goldman Sachs estimates that China’s weight in MSCI indexes will increase substantially over the next two years as A-share market weighting increases.  Each 1% increase of the MSCI Emerging Market index represents $15 billion of inflows into A-shares.

India: Indian markets have recovered strongly since February, pushing up P/E ratios above 20x compared to 17x historical average.  However, the high multiples are less of a concern in India because corporate profits are forecast to grow strongly over the next several years.

Chinus Asset Management (CHAM), a U.S. West Coast-based asset management firm, provides investors exposure to the alpha-generating growth in China, India, South Korea and Southeast Asia, by utilizing an active investment strategy and local managers in each region.

© 2016, Chinus Asset Management, LLC

The Case for Vietnam

A trip this month to Ho Chi Minh City showed just how rapidly Vietnam is progressing.  Chic restaurants and boutique hotels line the streets.  Young people crowd into internet cafes and coffee shops.  Foreigners, including South Korean industrialists, Swiss investment managers, French chefs and Australian backpackers clog the airports.  Vietnam is attracting attention for good reason.

This is especially true from an investment perspective.  Vietnam is one of the most promising frontier markets.  Although it is poorer, and its equity markets are smaller and less developed than many of its Asian cousins, Vietnam is catching up rapidly.  If it is able to do so, it will create substantial shareholder wealth in the decades ahead.  

Vietnam has several attractive macro characteristics that are contributing to rapid economic growth.

Large, young and educated population Vietnam has 94 million people, the third most populous ASEAN country after Indonesia and the Philippines.  The average age is under 30, and only 35% live in cities.  Even so, the literacy rate is above 95%.  Population dynamics should provide a large boost to economic growth as more people enter the workforce, and move to cities and take on more productive jobs.

Competitive labor costs The average Vietnamese worker earns less than $200 per month, less than half the cost of a Chinese worker and among the cheapest in Asia. As a result, Vietnam is experiencing a surge in foreign direct investment as manufacturers look for alternatives to China.

 

Rapid increase in per capita income and consumption. Vietnam is approaching the inflection point where income per person has shot up in other Asian countries (known as the S-curve for income growth).  This cycle typically leads to a surge in consumer spending as people can increasingly afford aspirational items.

These factors are contributing to forecasted economic growth of 6.7% in 2016, among the highest in the world.  

The Vietnam stock market, which was launched in 2000 with two stocks, now has almost 700 listed companies with total market capitalization of $61 billion. 

The government recently passed several critical reforms that should provide a large boost to the stock market.  These include:

  • In September the government relaxed the 49% ownership limit for foreign investors to 100% for all companies except banks and a few strategically important sectors.  Previously, several companies had been at the 49% limit for several years, which was a major restraint on foreign participation.
  • The government is aggressively selling off state owned enterprises by listing them. There were 222 IPO’s of SOE’s in 2015 and another 174 companies have been identified for listing.
  • Increasing the level of corporate disclosures, which is one of the last hurdles necessary for MSCI to promote Vietnam from a “frontier” market to an “emerging” market.  Attaining emerging market status would open up its stock markets to a much larger pool of investors. 

Vietnam currently trades at a significant valuation discount to other Asian markets even though its companies generate a much higher return on equity and pay out one of the highest dividends. It is attractive on many fronts.

We believe that the best way to capitalize on the growth of Vietnam’s equity markets is to do so through locally based managers with deep knowledge of local markets and companies.  We specifically seek out managers that excel at identifying rapidly growing companies that are often overlooked or misunderstood by the market. 

Surprisingly for a frontier market, Vietnam has several fund management firms with long track records and large teams of analysts.  We look forward to adding one or more Vietnam managers to our portfolio. Although Vietnam is still in the early stages of development, we believe it is poised for take-off.

Chinus Asset Management (CHAM), a U.S. West Coast-based asset management firm, provides investors exposure to the alpha-generating growth in China, India, South Korea and Southeast Asia, by utilizing an active investment strategy and local managers in each region.

© 2016, Chinus Asset Management, LLC.


India Readies for More Dovish Fed and Bull Rally

India has been firing on all cylinders to lay the groundwork for invigorated, tangible domestic growth and to shore up its diplomatic currency globally.

Under Modi’s leadership over the past two years, India has (i) implemented a nationwide social security system and comprehensive bankruptcy code, (ii) overhauled a decades-old tax treaty network along the Mauritius-India and Singapore-India corridors, (iii) digitized its incorporation and e-governance platforms and (iv) streamlined approvals in more consolidated and transparent fashion.

Abroad, it has been aggressively negotiating alliances across Asia, and globally, to position itself as a national partner for manufacturing, consumption and investment. Its most recent diplomatic ambitions have included lobbying for recognition as a global strategic and defence partner of the US, and a push for inclusion in the NSG.

The progress has been demonstrable for investors. Private equity saw more exits, venture capital deals boomed, and distress players should soon reap the rewards of the government's focus on cleaning up the balance sheets of public sector banks.

Indian equities, however, haven’t yet reflected the tailwinds of these reforms, due to global macro conditions triggered by the U.S. tapering of its decade-long quantitative easing policy.

But, a few explosive kickers now lie in store for Indian equities:

One, the much anticipated uniform goods and services tax (GST) is now widely surmised to pass in the upper house of Parliament, where it has been blocked by opposition parties to date. Once passed, it should normalize national supply chains, payment processing and revenue collection on a scale never before experienced across India’s 29 states.

Second, RBI Governor Raghuram Rajan’s recent announcement that he will not seek a renewed term as chief of the Reserve Bank of India confirms India’s intention to appoint a more dovish Fed head who we can expect will pare back interest rates, a move that many domestic voices are pushing for in order to further propel India into the limelight as the world's fastest growing economy.

Third, this week, the Modi administration finally opened up FDI in sectors such as defense and pharma to majority foreign ownership, and relaxed local sourcing rules for single brand retail. These changes should jumpstart a backlog of stalled deals into action and further stimulate increased foreign direct investment into India.

A big importer of energy, India is wise to move quickly to ride its favorable momentum while the global price of crude oil remains low, as a continued rise in oil prices or spike in domestic inflation could slow its sprint. Those negative factors notwithstanding, one can expect corporate earnings in India to get a big boost in the medium term assuming these kickers pan out as intended.

The author, Asma Chandani, is Managing Director and General Counsel at Chinus Asset Management, a U.S. West Coast-based asset management firm that provides investors exposure to the alpha-generating growth in China, India, South Korea and Southeast Asia, by utilizing an active investment strategy and local managers in each region.

The Case for Indonesia

During a recent visit to Jakarta, it was evident that Indonesians are optimistic. Investment managers, business leaders and taxi drivers all voiced their opinion that things are getting better and that the future is bright. Up to now, Indonesia has generally punched below its weight. It is often lumped together with its other ASEAN neighbors Singapore, Malaysia, Thailand, the Philippines and Vietnam. However, Indonesia appears to be poised for a break out. If it is able to achieve its vast potential, Indonesia deserves to be treated as a distinct investment focus and not just as a member of ASEAN.

With 255 million people, Indonesia is the fourth most populous country in the world and the largest in ASEAN. Its economy is also the largest in ASEAN.

After several years of slowing growth, Indonesia’s economy is poised for a strong recovery.  President Jokowi has recently pushed through important reforms, including opening up much more of the economy to foreign investment, reducing red tape, and implementing a series of stimulus packages. These measures are having an impact. Foreign direct investment jumped 16.9% YoY in Q4 2015, and economic growth is forecast to top 5% in 2016 and accelerate thereafter.

Longer term, Indonesia’s economy will be driven by two areas:

  • Infrastructure: Jokowi is focusing on infrastructure spending to spur economic growth. Government infrastructure spending increased 47% in 2015 and is expected to increase an additional 32% in 2016. This follows several years of underinvestment that has resulted in higher logistic costs (27% of GDP in Indonesia vs. 13% in Malaysia) and bottlenecks that have limited growth.  

McKinsey forecasts that Indonesia will need to spend $600 billion over the next decade to meet its infrastructure needs. The government has the capacity. The fiscal deficit is a modest 2.5% of GDP and aggregate government debt is only 29%.  

In addition, Indonesian economic growth is expected to be boosted by a demographic divided as half the population is under 30, and a rapid expansion of intra-ASEAN trade as barriers come down. Overall, these factors could boost annual economic growth rates above 7% for the next several years. In fact, the Economist Intelligence Unit forecast that Indonesia’s economy will grow to become the 4th largest in the world by 2050.   

Indonesia’s size and relatively rapid rate of economic growth should gain increasing investor attention in the years ahead.  Mid and small caps look particularly attractive right now as they have declined by over 40% over the past three years (2013-15).

We are planning to increase our Asia fund’s exposure to Indonesia and are considering investing with an Indonesia-focused manager. We share the optimism of the Indonesian people.

Chinus Asset Management (CHAM), a U.S. West Coast-based asset management firm, provides investors exposure to the alpha-generating growth in China, India, South Korea and Southeast Asia, by utilizing an active investment strategy and local managers in each region.

© 2016, Chinus Asset Management, LLC. 

 

 

 

 

 

China Presents Economic Targets for 2016

China’s annual parliamentary session of the National People’s Congress kicked off last week, with Prime Minister Li Keqiang presenting the government’s report on its economic targets for 2016.  

The report indicates three key trends that will affect China’s economy and the direction of its macro policies:

1.     Maintaining Growth is a Top Priority

The government set the growth target for 2016 at between 6.5% and 7%, slightly lower than last year’s level of about 7%. A drop in the GDP target indicates that the government accepts lower growth and will focus more on growth quality. By setting 6.5% as the floor, the government delivered a strong signal that China will not allow a hard landing. 

Notably, the government did not set a target for exports, weakening the argument that its adjustment of the exchange rate policy last year was a competitive devaluation aimed at boosting exports.

To meet its growth target, the fiscal deficit will increase to 3% of GDP, up from 2.3% in 2015. Fiscal support is expected to be limited, with monetary policy continuing to play an important role.  

2.     Infrastructure Investment Remains a Key Tool

The main drag on China’s GDP growth in 2015 stemmed from the 50% y-o-y decline in growth of fixed asset investment ("FAI"), which fell to 10% last year. Most of the slowdown came from property investment, which rose only 2% in 2015. In contrast, infrastructure investment was up 17% last year. It is expected that property investment will remain at low levels in 2016, due to sluggish demand in Tier-3 and Tier-4 cities. Manufacturing investment is unlikely to rebound due to overcapacity in many sectors. 

Consequently, infrastructure is the principal means of stabilizing FAI growth in China. The government report emphasized its continued support for infrastructure investment. 

3.     Expect Continued Restructuring of State-Owned Enterprises

There is reason for optimism on the reform of state-owned enterprises ("SOEs"), which the Chinese government recognizes as increasingly unaffordable due to diminishing profits and rising debt. Pressure, incentives and subsidies from the government to restructure these so-called zombie enterprises will differentiate the healthy enterprises from the unhealthy ones, and ultimately lead to the survival of the fittest.

For a more detailed analysis, please refer to "Weekend Reads from China: What Investors Need to Know about the NPC Report".

CHINUS ASSET MANAGEMENT (CHAM), a U.S. West Coast-based asset management firm, provides investors exposure to the alpha-generating growth in China, India, South Korea and Southeast Asia, by utilizing an active investment strategy and local managers in each region.  

© 2016, Chinus Asset Management LLC.

 

Taking Stock of India’s #Budget2016

After a tumultuous Q1 for global stock markets, investors are increasingly seeking to take advantage of attractive valuations. Bolstered by strong macro fundamentals, the SENSEX closed on Friday with its highest weekly gain in seven years, and the NIFTY just shy of 7,450.

Last week, Goldman Sachs reaffirmed its overweight position in Indian equities given India’s continued relative appeal to its Asian peers, betting that buoyant consumption demand and government spending will bolster corporate profits. Goldman’s report estimates gains, in $ terms, in the low-teens from Indian stocks, based on expectations of 10-14% growth in corporate earnings. 

India’s Budget 2016, presented in Parliament as the Finance Bill 2016 (the“Budget”), evidences the Indian Government’s bilateral commitment to both (i) fiscal discipline and (ii) to the stimulation of infrastructure investment, entrepreneurship and domestic consumption. The Budget sets ambitious revenue targets for proceeds from the divestment of state-owned companies and telecom bandwidth sales. It also sets high targets for direct tax collection, based on a 12% growth estimate for corporate earnings.

Low commodity prices and a tamed CPI inflation of 5.4% give Reserve Bank of India (“RBI”) Governor Raghuram Rajan greater fiscal space to cut interest rates in upcoming months. India’s current account deficit is down to 1.4% of its GDP and its foreign exchange reserves have climbed to US$ 350 Billion. 

The Budget also confirmed that India has now achieved the highest coal production growth in over two decades, highest ever capacity addition in generation, and highest ever increase in transmission lines, as the burgeoning country leapfrogs towards transformative growth.

Notably, the Budget acknowledges the systemic vacuum that presently exists in India with regard to bankruptcy situations in financial firms, and commits the Government to the introduction of a comprehensive ‘Code on Resolution of Financial Firms’ Bill in the Parliament later in the financial year. This code, together with the Insolvency and Bankruptcy Code 2015, when enacted, will provide a contemporary and holistic resolution mechanism for liquidation and bankruptcies, for the first time in Indian legislative history. The Budget also introduces Governor Rajan’s previously outlined committee-based approach to monetary policy. 

#Budget2016 demonstrates a strong commitment to (i) developing the corporate bond market, (ii) increasing retail access to government securities and (iii) radically improving the ease of doing business in India. And, by expanding the basket of eligible FDI instruments to include certain hybrid instruments, the Budget confirms the Government’s evolving capacity to appreciate nuances within corporate securities utilized in global finance.

On the downside, the Budget perpetuates India’s policy paralysis on certain issues affecting foreign asset managers by failing to immediately deliver long promised certainty to foreign investors on the introduction of General Anti-Avoidance Rules (GAAR) or clarifications on residency benchmarks for foreign companies. 

In his Budget speech, FinMin Jaitley once again broached the now notorious, retroactive tax amendment introduced by the 2012 Finance Act. He reiterated the Government’s commitment to provide a stable and predictable taxation regime and to reign in the “tax adventurism” of its revenue department. 

Significantly, the Budget proposes to amend section 115JB of the Income-tax Act to provide that Minimum Alternate Tax (MAT) shall not be applicable to a foreign company, w.e.f. 01.04.2001, if the foreign company does not have a permanent establishment or a place of business in India. This clarification is welcomed by foreign investment managers investing into India from offshore funds.

The FinMin, in local vernacular, likened his administration to a skilled crewship, equipped and confident in navigating India through global headwinds. He emphasized the imperative that India “firewall” itself from macroeconomic weakness and volatility. 

There’s always room for improvement, but, in a nutshell, India’s 2016 Budget personifies real transformation in policy, in leaps and bounds, and in harmony across Prime Minister Narendra Modi’s fifteen Ministries. All in all, a milestone achievement for India!

(This article was authored by CHAM Managing Director Asma Chandani, and has appeared in The Economic Times and DaWall Street.)

CHINUS ASSET MANAGEMENT (CHAM), a U.S. West Coast-based asset management firm, provides investors exposure to the alpha-generating growth in China, India, South Korea and Southeast Asia, by utilizing an active investment strategy and local managers in each region.  

© 2016, Chinus Asset Management LLC.