2021 Annual Review and 2022 Outlook
The ACATIS QILIN Marco Polo Asia Fund has gained 37% since its inception in June 2019 and outperforms the MSCI All Countries Asia by around 6%. The fund has approximately 170 million assets under management.
The year 2021 has been a difficult year for Chinese equities and for Chinese technology- and internet companies. International investors pulled out of these companies, putting the corresponding stocks under enormous pressure. Given the Acatis Qilin Marco Polo fund’s high exposure to technology and China, the fund was also hit hard and recorded a price correction of 14% in the calendar year 2021.
The performance of Asia and China funds in 2021 was strongly influenced by their respective China and technology exposure. Asian funds with low exposure to China and tech tended to perform better. Pure China funds with a high tech-share performed mostly poorly. Some of the largest China funds in the world have lost over 35% since their peak in February 2021, technology-oriented China funds even lost as much as 50%.
Amongst the Asian markets, our portfolio companies in India, Taiwan, South Korea and South-East Asia performed very well. The driver of the price correction was the Chinese market and in particular the Chinese companies listed in Hong Kong (H-Shares) and in the US (N-Shares). The Hang Seng Index of Chinese companies in Hong Kong, for example, is at a 5-year low. Amongst Chinese companies, Internet and other newly regulated industries, such as education and pharma lost most in value. New Oriental Education lost over 80%, Alibaba over 60% and Hengrui Medicine over 40%. Accordingly, the stocks in our portfolio with negative performance contributions can be found precisely in these areas.
Overall, in 2021, the valuation of Chinese companies decoupled from the development of the real economy. While gross national product rose by 8.1%, stock prices fell by more than 10% across the board.
China and some countries in Asia are the global winners of the COVID-19 pandemic. The Chinese economy is performing better than many analysts expected. China's foreign trade has also reached new dimensions. The total volume of foreign trade rose to $6 trillion in 2021, which is $1.3 trillion more than in 2020 and represents growth of more than 16%.
At the same time, however, there was a significant price correction in the capital markets due to global as well as Chinese political challenges: Globally, it became clear that the US-China conflicts including trade imbalance, Taiwan, Hong Kong, and Xinjiang will also continue under a Biden administration. In particular, the US government further expanded the so-called "blacklist" of Chinese companies and issued a new regulation threatening a possible de-listing of Chinese companies in the USA if they do not fully disclose their accounting documents to the American authorities.
In this already difficult international environment, the Chinese government took further measures that negatively affected the capital markets. In particular, the new focus on the so-called "common prosperity" led to a wave of new regulation.
For 2022 China is aiming for a healthy, albeit slightly lower, economic growth of around 5%.
We anticipate a positive and proactive growth-supporting fiscal policy and an aggressive development towards CO2 neutrality in 2060. Also, Chinas’ strategic approach towards “future” industries like artificial intelligence, electric vehicles, robotics, and semiconductors will drive its development. Finally, we believe that many sectors have experienced an unjustifiably high price correction.
Although China is one of the winners of the Covid pandemic, we consider Omicron a potential risk. China has so far been able to implement a "Zero Covid Strategy" through consistent shielding from abroad and rigorous quarantine regulations for several megacities. It has its own vaccines; however, efficacy rates appear to be lower than some foreign vaccines that are not approved for distribution in China. A more contagious variant could lead to quarantined megacities, closed factories, delayed logistics, and thus have negative effects on the entire macroeconomy. We see further risks for 2022 in the continuation of tensions between the US and China, the US export restrictions on technology and advanced production facilities to China, the liquidity shortage in the US due to the increase in bond yields, the implementation of the regulation on the Chinese internet industry, the closed real estate market in which companies such as Evergrande have run into financial problems, as well as the continued efforts of China's "Common Prosperity". While we do not expect any new and additional measures in these areas, the further implementation of the already announced measures alone will lead to further volatility in the market.
In the medium and long-term, we continue to believe that China will become the world's largest economic power as early as 2028. All macroeconomic indicators are continuously developing in this direction.
In order to reflect these new regulatory conditions, we have adapted our portfolio. We have completely withdrawn (e.g., Pinduoduo, Weibo, New Oriental Education, Tal Education, and Shanghai Pharma) or reduced (e.g. Alibaba, JD.com, Netease, JD Health, and Fosun Pharma) our exposure in many internet, education, and pharmaceutical stocks. On the other hand, we have invested in "tailwind industries", that are being aggressively developed by China (e.B. XPeng electric vehicles, Xinjiang Goldwind, and Will Semiconductor).
In 2022, we will continue to adapt our portfolio. We plan to reduce our China and technology exposure but will continue to have a higher focus than other Asia funds. More specifically, this means:
Chinese tech companies have suffered greatly from government regulations. We believe that the new regulatory conditions have largely been priced in and that in many cases the adjustments have been too strong. Therefore, we plan to reduce but will remain invested in the current positions (we have already exited industries such as education that will not recover from the new regulations).
We are cautious about investing in new, unregulated, highly valued segments, as there is a risk of price corrections in these sectors in the coming months (CATL, for example, the global leader in electric vehicle batteries, is trading at a P/E of 136)
We intend to slowly but steadily reduce our exposure to US N-Shares. While the price corrections in N-shares are, in our view, overreactions (Alibaba P/E of 18% versus Amazon P/E of 66), we see the long-term pressure from the US-China conflict and the risk of a de-listing for these Chinese companies in the US.
We plan to maintain our exposure to the Hong Kong stock market (where nearly a third of our portfolio companies is listed). Tencent, for example, continues to grow steadily each quarter with a profit margin of 28% and a P/E of 19.
We aspire to increase our market presence in Shanghai and Shenzhen. These markets are still somewhat shielded from global investors. Without the so-called Stock Connect or a "Qualified Foreign Investor" license, foreign investors cannot directly invest there. As such, the foreign investor sell-off in 2021 did not significantly impact the Chinese A-Shares, and they are currently rather highly valued. Investments in this segment must be carefully selected.
We will likely increase our market presence in other Asian markets. These include India, South Korea and Taiwan.
Overall, our medium- to long-term assessment on the development of Asia and China remains positive and unchanged. It is unlikely that China will significantly underperform the other Asian countries in the capital markets in the coming year.