Report - Nikko AM Asia Limited

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Portfolio Review Underperformed during the period under review During the six months under review, the Nikko AM Shenton Global Property Securities Fund (the “Fund”) delivered a return of -1.62% (SGD terms, on NAV-NAV basis), underperforming its benchmark by 109bps. Stock selection in Hong Kong and Europe also contributed negatively. Particularly in Europe, the Fund underperformed as the exposure is in high quality names and some peripheral countries staged a strong rally. Underperformance was mitigated by underweight allocations in US and Canada, and Australia. Market Review Global property stocks declined for the six-month period Global property stocks fell during the six months to December 2013, with the EPRA/NAREIT Global Index declining 1.0% in USD terms. Stocks in Europe gained, while those in the Asia-Pacific region and Americas lagged. US property stocks fell despite improving macroeconomic data U.S. property stocks fell 5.6% during the period under review in USD terms, according to the FTSE EPRA/ NAREIT US Index. On economic news, macroeconomic data continued to show improving conditions. The December Preliminary Manufacturing PMI Index had increased to 55, higher than both prior data of 54.7 and expectations of 54.4; while weekly jobless claims fell by 2,000 to 339,000 in the period ended December 28, lower than its median forecast of 344,000 claims. On notable company news, Empire State Realty Trust launched its USD 1bn IPO while Brookfield Property Partners offered to buy the remaining shares of Brookfield Office Properties for USD 5bn. Also, Essex Property Trust and BRE Properties signed a definite agreement under which BRE Properties will combine with Essex to create a West Coast pureplay multifamily REIT. Meanwhile, Simon Property Group announced that it plans to spin off all of its strip center business and smaller enclosed malls into an independent, publicly traded REIT. European property stocks gained on supportive measures by the European Central Bank (ECB) European property stocks surged during the six months to December, with the FTSE EPRA/NAREIT Eurozone Index up 12.4% in USD terms. The ECB continues to take steps to support sovereign bonds and its repeated interventions seem to have abated the crisis in Europe. Although structural issues need to be resolved, markets have given policy makers a breather. On economic news, the Eurozone consumer confidence index rose from -15.4 to -13.6 in December, the highest level since July 2011. Meanwhile, the Swedish Riksbank reduced the base interest rate by 25bps to 0.75% and the ECB cut rates to 0.25% in a push for growth. On company news, Klepierre signed a memorandum, led by Carrefour, for EUR 2.01bn for its proposed disposal of a portfolio of 127 Carrefour-anchored retail galleries to a consortium. Furthermore, Deutsche Wohnen announced an all-share public exchange offer for GSW, which will create the largest German real estate company. UK property stocks surged on positive economic data UK property stocks gained 21.3% in USD terms during the period under review, as measured by the FTSE EPRA/NAREIT UK Index. On economic news, Consumer Price Index year-on-year (YoY) dropped in November to 2.1% from 2.2% in October. On the contrary, Halifax house prices showed a continuing uptrend, rising 1.1% month-on-month (MoM) or 7.7% YoY in November. IPD capital growth increased 0.9% MoM in November led by Industrial (1.6%) while Retail lagged (0.4%). On notable company news, Hammerson sold its 50% stake in Queensgate Shopping Centre in Peterborough for GBP 202m to Invesco reflecting a 6.4% yield and producing an ungeared internal rate of return of 16.1% since the initial purchase in June 2012. Meanwhile, British Land JV Partner Blackstone has agreed to sell its 50% stake in Broadgate for GBP 1.7bn to Singaporean sovereign wealth fund GIC. Japanese property stocks climbed on strong retail sales and industrial production Japanese property stocks climbed 12.7% in USD terms during the half-year, according to the FTSE EPRA/ NAREIT Japan Index. On economic news, retail sales were strong in November; growing 4.0% YoY and 1.9% MoM, and we expect it to remain strong ahead of the consumption tax increase. Industrial 3
production index increased 0.4% MoM and 5.4% YoY in November according to preliminary data. Also, Tokyo office vacancy dropped to 7.34% at the end of 2013, the lowest since August 2009. On company news, Mitsubishi Estate Co. Ltd. paid GBP 90m for Clive House, a London office building. Among notable offerings, GLP Japanese REIT (J-REITs) successfully raised JPY 23bn and the Japan Retail fund successfully raised JPY 38bn in a secondary offering to buy assets. Asia-Pacific property stocks traded lower in the six-month period Australian REITs (A-REITs) fell 4.6% in AUD terms during the period, according to the S&P/ASX 200 A-REIT Index, while Hong Kong lagged behind with a decline of 3.9% in HKD terms, as measured by the Hang Seng Property Index, followed by Singapore property stocks also falling, losing 2.2% in SGD terms. In Australia, the Reserve Bank of Australia had reduced its cash rate by 25bps to a record low of 2.5%. On other developmental news, Westfield Group announced it sold seven non-core malls for USD 1.6bn and it will merge its businesses in Australia and New Zealand with Westfield retail Trust to form a new entity to be known as Scentre Group. Meanwhile, Dexus Property Group and GPT Group are in the midst of making a cash and script offer for the board of Commonwealth Property Office Fund. Elsewhere, in China, new home sales remains brisk, defying the traditional year-end lull despite a number of secondtier cities had reinforced their property tightening measures in view of a property share price correction. In Hong Kong, new home prices eased in the last 2 months of the period under review following brisk new home sales, driven by significant discounts offered by developers. On the contrary, Singapore’s new private home sales were volatile following its four-year low in July after the government announced that new permanent residents will have to wait three years before being allowed to buy a Housing Development Board flat from the resale market. Outlook / Portfolio Strategy US economic data remains skewed to the positive The US economic data continues to remain skewed to the positive. Notably, the economy continues to add jobs and the unemployment rate has fallen below 7.0%, the lowest reading since November of 2008. In addition, continuing strength in the housing and equity markets, combined with tame inflation, are boosting confidence in the economic recovery. From a monetary perspective, we expect the US Federal Reserve to taper but expect the policy to be fairly accommodative from a historical perspective. We have continued to position the portfolio in stocks that are likely to benefit most from an improving economic backdrop and are less affected by the potential for rising rates in the US. In Canada, we continue to see a challenging REITs market due to rising interest rate and low organic growth, and keep our positive bias in the US. Continue to be pessimistic about Southern Europe vis-à-vis Northern Europe and Scandinavia In Europe, we expect economics news flow to be marginally positive next year, and German policies to remain supportive of Europe. Although Europe continues to attract capital on the back of accommodative monetary policy on the continent, we expect European growth to be sluggish in 2014. From a monetary perspective, we expect the European Central Bank to ease monetary policy to support growth. We continue to be pessimistic on the economic outlook of Southern Europe vis-à-vis Northern Europe and Scandinavia but we have reduced our underweight given its reduction in sovereign risk. Overall, we think that the focus will return to growth in Europe. UK economy continues to be positive UK economic conditions continue to be positive, with economic data indicating the start of a broad-based recovery. We expect the Bank of England governor, Mark Carney, to continue with an accommodative monetary policy and a positive boost to the housing market supported by the Government ‘Help to Buy’ program. The current weakness in the currency continues to make London an even more attractive place for capital. While growth in London remains strong, we expect growth outside of London to accelerate. Expect further easing in Japan Further easing by the Bank of Japan is likely in 2014 and we expect the Bank of Japan to continue purchasing assets, boosting market sentiment. We also expect the Japanese economy to strengthen on 4
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