18-Oct-2021:  LivewireMarkets.com: Is now the time to be greedy in China? [Angus Kennedy]

I've recently gone rather bearish on Chinese tech, as outlined in my recent Bear Case straw for ASIA, but Angus Kennedy from Livewire Markets presents some alternative views in this piece, which makes for interesting reading.

04-Oct-2021:  I'm getting a bit worried about the extent to which Beijing is attacking their own large tech companies and trying to regulate them to a much greater extent.  With the benefit of a little hindsight and a lot of extra reading, it now seems (since I typed up my "Bull Case" straw for ASIA) that Xi Jinping was not JUST pissed off with Jack Ma's speech back in October when JM criticised the CCP/government for lacking innovation while talking up his financial technology firm Ant Group, which was about to list on the Hong Kong and Shanghai stock markets.  Soon afterwards, Beijing quashed the fintech's public listing, apparently at the behest of President Xi Jinping.  It was a big shock for global investors at the time since Ant, despite its name, was one of the world's largest financial companies, on par with PayPal.  The Ant Group IPO was expected to raise $47.5 billion ($US34.5b) and become the largest initial public offering (IPO) in history.  It is now far from clear if it will ever IPO, or if it does, when, and at what price?

This now goes far beyond Jack Ma and Alibaba (and Ant Group).  Xi Jinping has made it very clear that he want to curb rampant capitalism in China, particularly in big business, and reduce the power and cockiness of the multi-billionaires running China’s largest private companies.

In that light, I think there could be some further near-term and mid-term downside in Chinese-tech-heavy ETFs and funds such as ASIA, and I'm going to step aside from them until the extent of the damage has become far more clear.

I sold out of EAI during September (in RL) and I will be selling my ASIA units out of my SM portfolio here today.  Or tomorrow if I didn't manage to get the sell order into SM before market close (it was close!).

Further Reading:  ABC News: 19-Aug-2021:  China's crackdown on 'powerful' tech giants may be a 'terrible own goal'

I do not currently hold ASIA, although I think the ETF is getting very interesting at current levels.  I do hold the Ellerston Asian Investments (EAI) LIC, which I mostly bought because I liked Mary Manning as their PM (portfolio manager), and even though Mary has now left Ellerston, I continue to hold EAI.  I'm encouraged by EAI's recent communication about their plans to close the gap between their NTA and their SP.  They would likely be feeling a little scared I imagine about Geoff Wilson's new LIC, WAM Strategic Value (ASX: WAR), which is buying significant stakes in underperforming LICs and/or LICs with big discounts-to-NTA/NAV in their SPs (share prices).  Geoff will often end up trying to take over the management of LICs that he has a significant stake in, or else getting their board rolled and replaced with people that he has nominated.  He has a pretty good success rate too.  Therefore, people who are the PMs or are on the board of these LICs are facing the possibility of losing their own jobs at some point if they don't do a good enough job.  My view with PAI is that the upside from here looks better than the downside, so on balance they still look like a good investment.

However, back to ASIA, which is not a LIC.  ASIA is a active ETF, so an ETF with active management where they have chosen Asian companies to invest in based on certain criteria, much of which (as I understand it) has to do with company growth and size, as well as the industries that they operate in.  They invest in larger companies that are growing fast and have structural and industry tailwinds.

On what has happened since the Ant Group (/Ant Financial) IPO (from Jack Ma's Alibaba Group) got shut down in early November 2020 by the Chinese Central Government, and the associated fall in the share prices of fast growing Chinese companies like Alibaba and Tencent, which has obviously translated into the unit price of ASIA falling, my thoughts are that the Chinese Central Government (CCG) do not like Chinese businessmen getting too powerful to the point where they feel they can criticise the Government or the Party, or to question their policies, as Jack Ma did just before the Ant Group IPO was scheduled to occur (and was halted by the CCG). 

However, the Chinese Central Government (CCG) do want to have very successful Chinese tech companies, and I expect they also want them to be more successful than their US counterparts.  They also want people from outside of China to invest in those Chinese companies and in China.  For those reasons, I feel that this perceived "crackdown" is temporary and is really a lesson to people like Jack Ma that no matter how rich and successful you are, you are NOT more powerful than the Government, and you do NOT question the policies of the Government.  I note that Jack has said NOTHING publicly (or very little) since that speech, so I feel that he did get the message.  I do not know if Alibaba (BABA) is going to be able to spin out Ant Group or not in the future, but regardless of that I feel that companies like Alibaba and Tencent are going to keep growing and their share prices are going to recover.  

LICs like EAI and PAI and ETFs like ASIA are all holding other companies also, like TSMC - Taiwan Semiconductor Manufacturing Company - which is one of the top 5 positions in all of those ETFs and LICs.  TSMC is ideally placed to benefit from the global shortage of semiconductors and other computer parts that currently exists.  They also have strong tailwinds of IoT (the Internet of Things), AI, continued automation and digitalisation, plus cloud computing.

In the case of the ASIA ETF, TSMC (which ASIA just call TSM) is their largest portfolio position, representing 11.06% of the fund.  At 31-July-2021, ASIA's top 10 positions were:

1. TSMC (11.06% of the portfolio), 
2. Samsung was their second largest holding (at 10.65%), then 
3. Alibaba (10.17%), 
4. Tencent (9.33%), 
5. Meituan (Meituan-Dianping) 5.85%), 
6. Sea (4.82%), 
7. Infosys (HQ'd in Bengaluru, India, 4.55%), 
8. JD.com (4.36%), 
9. Pinduoduo (3.91%), and 
10. NetEase (3.35%) was ASIA's 10th largest position.  NetEase has a huge gaming presence in China, however they do more than just games - see here:  Investor FAQs | NetEase, Inc. (gcs-web.com).

Those 10 positions represented 68% of the value of the entire ASIA fund, so their other 40 positions added up to only 32% of the fund.  They held 50 positions altogether.

So, to summarise, I think that weakness in an ETF like ASIA is temporary, not structural, and I think the share prices of the companies that ASIA (and LICs like EAI and PAI) hold will recover.  They might not ALL recover to the same extent, but most will recover and go on to higher levels than before the pullback, and ASIA will return to its growth trajectory. 

So I'm saying that the returns that the ASIA ETF have produced in prior years are certainly achievable again in future years, once the fear around the recent actions taken by the Chinese Central Government (CCG) to reign in their largest and most successful companies and their bosses has subsided.  My thoughts are that the moves made by the CCG were aimed at those company bosses and were not specifically designed to inhibit the growth and/or success of the companies themselves.  It is all about reminding everyone that nobody is above the CCG or exempt from their policies and expectations.

On the official CCG website (www.gov.cn) - Gov.cn: The Chinese Central Government's Official Web Portal (www.gov.cn) - the lead story today is titled, China marks 60th birthday of Xinjiang Production and Construction Corps and has a picture with the following caption: "China will allow all forms of capital to equally compete in the financial market through ease of market access, Chinese Premier Li Keqiang said on Friday."

I feel that China is keen to calm fears that doing business in China is difficult and risky, and I also feel that they want their own companies to succeed as much as possible in the global market.  In that light I think the recent period is temporary, not structural, and I feel that the weakness in the ASIA ETF on the back of the weakness in many Chinese companies' stock prices, is an opportunity rather than a serious red flag.

As things are right now, the ASIA ETF unit price is back at the same level they were at one year ago, but still well above levels achieved in prior years.  I see this as a good entry level actually, and I'll be looking at adding some ASIA to my portfolios during the coming week.

06-Mar-2021:  The BetaShares Asia Technology Tigers ETF (ASX: ASIA), as Strawman discussed in his weekly email, sent out earlier today, is a simple and inexpensive way to get exposure to fast growing Asian companies like Samsung Electronics, Taiwan Semiconductor, Tencent, Alibaba, Meituan, Pinduoduo, JD.com, NetEase, Infosys and Sea (those companies are their current top 10 positions). 

The management fee is 0.57% p.a. and their expenses are running at around 0.10% p.a. - for a total of around 0.67% in fees and costs per annum.

I do not hold ASIA shares (the ETF), having previously preferred Platinum's Asia Investments LIC (PAI), and currently I hold shares in EAI: the Ellerston Asian Investments LIC, whose portfolio manager (PM) is Mary Manning, who has previously worked for George Soros and then for Howard Marks' Oaktree Capital in New York and Singapore.  In Singapore, she was the sole person responsible for financial sector investments for Oaktree's Global Emerging Markets Hedge Fund.  I prefer that active management that I get with EAI, because I am NOT an expert on Asian companies and I like my Asian company exposure to be managed by somebody who clearly is.  However, it is worth noting that active management comes at a price.  EAI charge around 0.82% p.a. in management fees (average) plus a 15% performance fee.  You do NOT pay performance fees on ETFs.  If EAI interests you, you can check out their 31-Dec-2020 holdings (all of them in alphabetical order) here, and their latest (January 2020) newsletter here.

Something worth noting, and it becomes obvious when you look at the performance summary near the top of page 1 of that January newsletter, is that EAI's returns after fees and expenses (but before tax) have underperformed their benchmark index over the past year by -0.46% (around half of one per cent), with that benchmark being the MSCI Asia ex Japan (non-accumulation) (AUD) index, and they've also underperformed that index by -0.48% p.a. since inception.  Over three years however, EAI have outperformed the index by 1.85% p.a.  That suggests that over the past year, and over the longer term, you may have been better off in an index-hugging ETF, as long as their fees totalled less than 0.46% p.a.  However, such an ETF - with fees & expenses that low - does not seem to exist.  Asian ETFs all appear to have higher expense ratios than domestic or US focussed ETFs due to the higher cost of investing in Asian markets.  For example, the iShares MSCI All Country Asia ex Japan ETF (AAXJ, only available in the US) has an expense ratio of 0.70% p.a.

Our closest Australian equivalent appears to be ASIA, the Betashares Asia Technology Tigers ETF which enables holders to "Gain exposure to the 50 largest Asian technology companies (ex-Japan) in a single ASX trade" - which has total management costs (management fee plus expenses) of 0.67% p.a.   

The other thing to note is that while there is no active stock picking involved in ASIA (the ETF), there is a technology filter.  All non-tech companies are excluded, and then they buy the 50 largest tech companies across Asia (ex-Japan).  Their current geographic exposures are:

• China: 55.0%
• Taiwan: 21.4%
• South Korea: 18.1%
• India: 4.9%
• Hong Kong: 0.2%
• Other: 0.4%
• Total:  100%

And their sector exposure as of 29-Jan-2021 is:

• Internet & Direct Marketing Retail: 28.2%
• Semiconductors: 18.8%
• Interactive Media & Services: 17.8%
• Technology Hardware, Storage & Peripherals: 13.9%
• Interactive Home Entertainment: 8.2%
• IT Consulting & Other Services: 5.3%
• Electronic Manufacturing Services: 2.3%
• Movies & Entertainment: 1.1%
• Semiconductor Equipment: 0.9%
• Other: 3.5%
• Total:  100%

Click here for their fact sheet, and here for their website.

06-Mar-2021:  This straw and the graphic below concerns how the ASIA portfolio has performed.  For the full fact sheet, you can click here, or check out their website here.

06-Mar-2021:  The following graphic concerns the ASIA ETF's sector allocation and geographic exposures.  For more, you can view the whole fact sheet here.