The Jupiter Global Fund - Jupiter Asset Management

the jupiter global fund
Jupiter China Sustainable Growth
■■Jupiter China Sustainable Growth Review of Portfolio as at 30 September 2012
Performance
NAV 30.09.12 30.09.11 % Change
Class L US Dollar Shares USD 7.25 USD 6.21 16.75%
Class L Euro Shares EUR 7.48 EUR 6.11 22.42%
Class L Sterling Shares GBP 7.24 GBP 6.48 11.73%
Market Review
For most of the year under review, Chinese equities continued to see
a two-speed market whereby a small number of large-cap dividend
paying stocks became increasingly overvalued as investors sought
protection from slowing earnings growth. Meanwhile, mid and smallcap
growth stocks fell and are now trading at around their lowest
valuations in the last 10 years.
China’s pace of economic growth clearly slowed over the course of the
period, in response to various policy brakes applied by the authorities to
curb rising inflation. Having seen small and mid-sized enterprises
struggle to meet working capital requirements as credit was drained
from the financial system, the People’s Bank of China began to reverse
its monetary policy in November 2011. The central bank has reduced
the amount that it requires banks to hold in reserve, encouraged loan
origination and cut policy interest rates twice since then.
While it is tricky to predict when the Chinese economy may reach
inflection point, evidence suggests that monetary and fiscal stimulus
measures are producing some effect. In addition, consumer activity
has remained resilient with retail sales rising by a real rate of 11.4%
during the first eight months of 2012, compared to 11.3% over the
same period of 2011.
Policy Review
Over the year to 30 September 2012, the Fund returned 16.8% in US
dollar terms, compared to 8.0% for its peer group, the FO Equity
China, and 21.4% for its benchmark, the MSCI ZhongHua index.
The Fund’s performance was adversely affected by investors’ risk
aversion and flight to the perceived safety of large-cap stocks. Our
underweight stance in large-caps, especially in the financial sector,
detracted from performance. In line with our investment strategy, we
did not hold large Hong Kong property developers such as Cheung
Kong and Sun Hung Kai and banks including Bank of China which
outperformed during the period.
Although our overweight stance in the mid and small-cap sectors was
detrimental for performance, good stock selection among them offset
the negative impact of the asset allocation. In particular, some of the
portfolio’s resources and industrial holdings made strong contributions
to performance. Environmental protection company China Everbright
International, gas distributor China Gas, Hollysys Automation
Technologies, China Oil & Gas, ERA Mining Machinery and railway
trains maker CSR all added value. Among our technology holdings,
AAC Technologies, a supplier of acoustic components for smart phones
and tablet PCs, outperformed on the back of strong earnings results.
In terms of transactions, we locked in profits in resources and industrial
shares that had performed strongly. These included China Gas, China
Oil & Gas, ERA Mining Machinery and CSR. As the year progressed,
we reduced our underweight stance in the financial sector, acquiring
selected stocks that we believe will benefit from China’s looser
monetary policy and stimulus measures. We initiated positions in
Hang Lung Properties and China Construction Bank.
Outlook
The recent results season brought some better news, with profit
margins delivering positive surprises thanks to falling input prices.
Against the weak economic backdrop, this trend is expected to
continue as inflation remains muted. Meanwhile, consensus GDP
figures continue to fall followed inevitably by cuts in analysts’ earnings
forecasts. Much of this, however, appears to be already reflected in
share prices.
We expect a modest recovery in economic growth over the balance of
the year. With the manufacturing purchasing managers index showing
some improvement, we expect to see a pick-up in output in the fourth
quarter against a continuing backdrop of benign inflation.
The 18th Party Congress is scheduled to commence on the 8th of
November after which we will start getting more clarity as to the
make-up of the next ruling elite and any refining of their policies.
Coinciding with this important period of leadership change, we expect
the Chinese authorities to ease their monetary policy further and
introduce more stimulus measures. We expect the recent polarisation
of the market in favour of large-cap stocks to reverse sharply when the
macro backdrop begins to improve.
Philip Ehrmann
30 October 2012
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