In a volatile month, the portfolio gained ground outperforming the benchmark by a decent margin.
We started 2020 with the knowledge that a partial resolution to the US-China trade dispute and the never-ending generosity of the world’s central banks would continue to underpin strong equity gains in defiance of slowing world growth. Sadly, the coronavirus has turned this on its head. At the time of writing, there are more than 40,000 confirmed cases (and increasing) of coronavirus in China and around 1000 deaths, mostly in the ‘epicentre’ of Wuhan. The number of infected people is already substantially more than during the SARS outbreak of 2002/03, but the mortality rate is fortunately significantly lower. The degree of disruption is difficult to gauge at this point, but it will clearly be large, particularly for the travel, entertainment and food & beverage sectors. Chinese road, rail and air passenger numbers, for example, were reportedly down more than 75% during the normally busy Chinese New Year holiday period, and visitors to Macau were down almost 80%.
Markets were unsurprisingly weak against this challenging backdrop, with declines of around 2–8% for most countries. China’s market only lost around 4% – the market played catch up with a drop of 10% on its first day of trading after the Lunar New Year holidays, but has since recovered some lost ground. At the time of writing, the overall response from equity markets across the region has actually been relatively sanguine.
Elsewhere, the Indian budget was a bit of a damp squib, failing to deliver the additional reforms that many had (perhaps over-optimistically) hoped for. Income taxes were cut and there was a substantial increase in rural infrastructure spending, but there was nothing to address problems in the real estate or financial sectors, which are weighing heavily on growth prospects.
Indonesia’s Bank Mandiri was a strong contributor in January. Mandiri announced a very decent set of results for 2019, with double-digit loans growth, solid cost control and falling impairment charges helping the bank produce record high net profits. Mandiri had been a poor performer for much of 2019, because of concerns surrounding potential M&A activity, the possible impact of tight liquidity on margins and risks to asset quality arising from weaker growth. With regard to M&A, Mandiri’s management reiterated that its key priority remains the creation of shareholder value, not empire building. We can only take them at their word, but Mandiri walked away from at least two potential deals in 2019 because of price, fit, or quality issues. So far, at least, they are walking the talk on M&A. In terms of liquidity and margins, Mandiri’s reported net interest margin for 2019 was actually bang in line with guidance and only slightly lower than in 2018. Liquidity pressures seem to be easing and Mandiri is planning a $1.25bn global bond sale to boost its coffers. The core tier 1 capital ratio is more than 20% currently, so Mandiri is far from being capital constrained. In fact, we should be looking for a bigger dividend pay-out in 2020–2022. Finally, despite a couple of headline-grabbing restructurings in 2019, asset quality and credit costs both improved significantly in 2019. Hence, Mandiri’s share price has rallied a very 28% in AUD terms since October 2019, as these concerns have moderated or proved unfounded.
At the other end of scale, positions in South Africa were actually the weakest, with AVI (food), Mr Price (clothing) and Discovery (insurance) all among the weakest performers. We did not see much news flow around each company, and we can only assume it was a pull-back after these positions ended 2019 with a decent rally.