Mark Williams

Our response to rising economic activity in China

Mark Williams

Activity levels in China continue to improve. Feedback from company conference calls and news reports suggest that manufacturing activity is slowly recovering.


Channel checks indicate that sportswear companies, Anta Sports (a Fund holding), Li Ning and Fila have reopened approximately 95% of stores as of 17th March and that inventory clearance of Q1 is on track for 45-50% by end-March with 60-65% targeted by mid-April.


HSBC estimates that the daily coal consumption of six major electricity producers reached 75% of pre-Chinese New Year levels; blast furnace operating levels improved to 64.5% (from 63.5% a week ago); more than 65% of people who went home for Chinese New Year have returned to their places of employment; and real estate transactions have recovered to 51% of pre-Chinese New Year levels (from 14.4% a week ago). Work resumption is at 80% for major property developers.


President Xi Jinping has called for the city of Wuhan to gradually resume production and for other parts of the province of Hubei (where 49% of large industrial enterprises have resumed production) to incrementally remove travel restrictions.


We stand ready to make selective changes as opportunities present themselves. We are looking at companies that (i) are less exposed to the areas of the economy likely to be hit hardest and will recover more slowly (tourism, hospitality and consumer discretionary dependent on a physical presence, especially restaurants/entertainment/retail) (ii) have valuations that seem unwarranted


The areas that may provide most opportunity are:


  • China, as it is likely to recover first, having been affected by the virus first and having greater capabilities to manage its domestic economy.
  • Australia, as it has fallen 42% YTD in US$ terms, c.13% of which was currency.
  • Technology, as any supply or demand disruption should recover swiftly when normality returns.

Our February portfolio update included details of the initial modest changes made to the Fund as the coronavirus crisis escalated. We’ve made a handful of further changes so far in March:

  • Switched back from Cimic into Downer. A few months ago we had switched from Downer to Cimic as Downer was looking expensive. Since then, Downer has fallen more than 50%. Year-to-date, Downer has underperformed Cimic by around 13%. So we reversed the switch. Downer derives ~60% of its revenues from long-term Australian government contracts, has significant liquidity and has minimal refinancing due over the next 12 months. It should benefit from the transport infrastructure spending of the Australian federal and state governments. Downer trades at 7x price/earnings for 8-10% expected growth and a 7.5% dividend yield.
  • Sold BOC Aviation, a company that provides operating leases of aircrafts to airlines. Given a lot of airlines are cutting capacity and idling planes, BOC Aviation may have issues collecting lease payments if travel is disrupted for more than a few months. The balance sheet is strong as it has $5bn of available liquidity and up to 14 months of security deposits and has exposure to the top 20% of the airlines. Recently it completed a purchase and leaseback deal with Cathay worth $700m at attractive rates. However, the risks seem higher in the near term as air travel is unlikely to return to normalcy soon, thus impacting the profitability of the whole airline industry.
  • Sold DGB Financial, the largest bank in Daegu and Gyeongbuk, in the south east of the Korean peninsular. Daegu city recently recorded largest number of Covid-19 cases in Korea, and with 80% of loans on variable rates DGB’s net interest margin will be impacted in a falling interest rate environment. Banks are also likely to see a rise in non-performing loans in the aftermath of the current crisis.

We continue to look for a stabilisation of new cases of the virus globally. In our view, this is likely to be a sign of nearing the trough in equity markets. The economic and stockmarket impact of coronavirus is clearly very hard to predict but based on past experience of the SARS outbreak, a peak in new cases was associated with a turning point for markets.

MSCI China performance around peak new Sars cases

In China, the number of new Covid-19 cases is falling:

CV19 New Daily Cases China 19.03.20

Source:, as at 18/03/20


But globally, there has been a marked escalation in new cases and the number of new cases continues to accelerate:

CV19 New Daily Cases Global 19.03.20

Source:, as at 18/03/20


For a comprehensive list of common financial words and terms, see our glossary here.

Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in Funds managed by the Asia team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation. 


The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Friday, March 20, 2020, 9:45 AM