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GuinnessAtkinsonAsiaPacificDividendBuilderFundManagersMonthlyUpdate–November2017
Fund&Market
• TheFundperformedwellinOctoberandwasalittleaheadoftheMSCIACPacificexJapanIndexwhichrose3.79%inUSDtermsandoutperformedtheUS,UK,Europeandnon-AsianEmergingmarkets,asmeasuredbytheirrespectiveMSCIindexes.
• ThismakesAsiacomfortablythebestperformingregionthisyearandyet,asdiscussedbelow,valuationsarestillattractive.
• Technology,HealthcareandConsumerstaplesweretheoutperformersoverthemonthwhileTelecomcontinueditslong-termweakness,followedbyRealEstateandConsumerDiscretionary.Onacountrybasis,SouthKorea,Taiwan,SingaporeandChinawereoutperformers,asmeasuredbytheirrespectiveMSCIcountryindexes.
• TechnologystockswhichhadbeenweakinSeptemberaftertheiPhonelaunchrecoveredinOctoberwithmorepositivenoisescomingfromAppleaboutlikelydemandfortheiPhoneX.Thiscouldhavebeenmere’puff’fromthecompanywereitnotalsoforstoriesintheTaiwanesepressthatApplehasaskedcomponentsupplierstodoubletheirshipmentvolumesfortherestoftheyear.
• ThevaluationoftheportfolioisstillatadiscounttothemarketonaPrice/Earningsbasistradingon13.1x2017and12.0x2018estimatedearningscomparedtotheMSCIACPacificexJapanIndexwhichistradingon14.5xand12.6xrespectively.
• Asianmarkets,asmeasuredbyMSCIACPacificexJapan,arestillata26%discounttoMSCIWorldonareportedearningsbasisfroma30%discountatthestartofyear(ascomparedtothelongrunaveragediscountsinceJan1995of23%)-butthisnotmuchofareductioninthediscountgiventheleveloftheiroutperformancethisyear.Thereason?ReportedprofitsinAsiahavebeengrowingfasterthanindevelopedmarkets.
EventsinOctober
• Chinahadits19thPartyCongress;attheendofwhich,thenewleadershipline-upwasrevealed.PresidentXiJinpingandhisdeputyLiKeqiangremaininplace,asexpected,whilethefiveothermembersoftheStandingCommitteeretiredandwerereplaced.Importantly,alloftheseneedtoretireinfiveyears’timeandnocandidatestosucceedPresidentXiin2022werebroughtforward.Thus,wemustconcludeitisprobableXiwillstayonbeyondhis‘normal’10-yearterm.Thisisnotnecessarilyabadthingandinvestorsshouldmostlikelywelcomeit.Therearesometoughreformdecisionsaheadwithpossiblypowerfuloppositionfromvestedinterests.Politicalstrengthwillbeneedediftheyaretobecarriedthrough,andthisPresidentXiundoubtedlypossesses.
• Japan’sPrimeMinisterAbesecuredatwo-thirdsmajorityinthelowerhouseofParliamentinthesnapelection.
• Indiaannouncedasignificantrecapitalizationplanforitsstate-ownedbanks($32.4bn/1.3%ofGDP)overthenexttwoyearsinresponsetothebaddebtissuesfacingthesector.
• SouthKoreaismendingrelationswithChinaafterayear-longtussleoverthecountry’sdeploymentofTHAAD,ananti-missilemissilesystemtocounterthethreatfromNorthKorea.Tradeandbusinessrelationshavebeensignificantlyaffectedoverthepast12months.TheKoreanWonwasthestrongestcurrencyintheregionup2.4%againstthedollar.
GuinnessAtkinsonAsiaPacificDividendBuilderFundManagersMonthlyUpdate–November2017
• HappeninginNovember:USPresidentTrumpembarksonatwelve-daytourofAsiaduringwhichhewillmeetChina’sPresidentXi.
Outlook
• WeexpecttoseeinterestratesintheUSandUKriseonlymoderatelyinthecomingtwelvemonths.
• ThecapitalexpenditurecycleisshowingsignsofpickingupwhichissupportiveforAsia.• China’seconomicgrowthlookslikelytocomeinaheadofmarketforecastsforthisyearbutinthe
monthsaheadweexpectintensifyingeffortstotackleleverageinthefinancialsystem,debtinthecorporatesectoraswellaseffortstotaketheheatoftherealestatemarket.Allwillhaveadepressingeffectoneconomicgrowth.
• WeremainpositivebecausewearefocusedoncompaniesthatdonotrequirepolicydrivengrowthtoturnaprofitandtheportfolioistradingatadiscounttoAsianmarkets,asmeasuredbytheMSCIACPacificexJapanIndex.
Stocksnews
ThishasbeenagoodperiodforcompanyresultsoverthepastmonthandintoNovember.Twenty-onecompanieshavereportedquarterlyorhalf-yearlyresults.Sixcompaniesmissedtheirestimatesbutonlyone,EliteMaterialhasseenanadversemarketreaction.DBSGroup,Singapore’slargestbank,recordedthewidestmiss,butthiswastheresultofmanagement’sdecisiontorecognizeallproblemloansintheoilandgassegmentoftheloanbookandsetasideadditionalprovisions.Themarketwelcomedthemovewhichwasaccompaniedbypre-provisionoperatingprofitgrowthdrivenbyawideningofthenetinterestmarginandimprovedcostefficiency.
EliteMaterialhasa50%shareinlaminatesforrigidprintedcircuitboards(PCB)usedinsmartphones.Wehavebeenlookingforthesuccessinsmartphonestobereplicatedintheserver/networkingsegmentandthecompanyisontracktodothiswiththe24%revenuegrowthobservedinthisareain2016–itnowcontributesoveraquarterofallrevenue.However,intheshorttermthereareconcernsaboutsmartphonemarketsharelossastheiPhonemigratestoadifferenttechnology.Webelievethatthisconcernhasbeenoverplayedandwhiletherecentquarter’sresultswerebelowestimates,non-Applesmartphoneswerebiggercontributorsthanexpected.Thereisstillplentytogoforinnon-iPhonesmartphones,serversaswellasthepossibilityofrecoupingiPhonesharesowehavebeenaddingtotheposition.
WewroteaboutAsustekatthehalfyearstageasoneofourweakerpositions.Thecompanyisundergoingare-organizationofitsoperationsasthePCbusinessremainsunderpressureforweakerdemandandintensifiedcompetitionwhilethesmartphoneareahasyettoreachadequatescale.Wewerehappytoseetherefore,thatitsthirdquarterresultscameinaheadofthehighestestimates.GrossmarginwasbetterthanexpectedandthecompanyhasbeenhelpedonthePCsidebothbyreducedpricecompetitionfromHPandalsobystrongerdemandformotherboardsandgraphicscards.Thecompanystillhasawaytogotoresolvethechallengesitfacesbutweareencouragedtoseeintheseresults,thequalitiesthatdrewustothiscompanyinthefirstplace.
GuinnessAtkinsonAsiaPacificDividendBuilderFundManagersMonthlyUpdate–November2017
StShineOpticalisanotherstockwehavewrittenaboutasoptimismaroundthecompanyhasebbedandflowedoverthepastthreeyears.Thecompanyisenjoyinganotherupswingandthesharepricehasnowpushedthroughthehighin2014.Recentresultscamein9%aheadofconsensusestimatesreflectingthereaccelerationinsalesgrowth,whichthecompanyreportsmonthly.ExpansionintotheUSmarketistherecentpositivedevelopmentdrivingStShine’sshareprice.Anewonlineclientwasaddedin2016andnowaccountsfor85%ofUSsales.ThebeliefisthatsalesinthischannelcouldbemorestablethanthosefromBausch&LombinChina.Evenmoreencouragingly,thegrossprofitmarginforUSsaleshasnowincreasedtomatchthatofChinesesales.Marginexpansion,increasedproductioncapacityaswellasnewsalesareasarecombiningtomakeforastrongstory.
EdmundHarrissandMarkHammonds(portfoliomanagers)SharukhMalik(analyst)
TheFund’sinvestmentobjectives,risks,chargesandexpensesmustbeconsideredcarefullybeforeinvesting.Thestatutoryandsummaryprospectuscontainsthisandotherimportantinformationabouttheinvestmentcompany,anditmaybeobtainedbycalling800-915-6566orvisitinggafunds.com.Readitcarefullybeforeinvesting.
Investmentsinforeignsecuritiesinvolvegreatervolatility,political,economicandcurrencyrisksanddifferencesinaccountingmethods.Theserisksaregreaterforemergingmarketscountries.Non-diversifiedfundsconcentrateassetsinfewerholdingsthandiversifiedfunds.Therefore,non-diversifiedfundsaremoreexposedtoindividualstockvolatilitythandiversifiedfunds.Investmentsindebtsecuritiestypicallydecreaseinvaluewheninterestratesrise,whichcanbegreaterforlonger-termdebtsecurities.Investmentsinderivativesinvolverisksdifferentfrom,andincertaincases,greaterthantheriskspresentedbytraditionalinvestments.Investmentsinsmallercompaniesinvolveadditionalriskssuchaslimitedliquidityandgreatervolatility.Fundsconcentratedinaspecificsectororgeographicregionmaybesubjecttomorevolatilitythanamorediversifiedinvestment.Investmentsfocusedinasinglegeographicregionmaybeexposedtogreaterriskthaninvestmentsdiversifiedamongvariousgeographies.Investmentsfocusedontheenergysectormaybeexposedtogreaterriskthaninvestmentsdiversifiedamongvarioussectors.
MSCIACPacificEx-JapanIndexisamarketcapitalizationweightedindexthatmonitorstheperformanceofstocksfromthePacificregion,excludingJapanconsistingofAustralia,China,HongKong,Indonesia,Korea,Malaysia,NewZealand,Philippines,Singapore,Taiwan,andThailand.
OnecannotinvestdirectlyinanIndex.
Price/EarningsRatio(P/E)isanequityvaluationmultiple.Itisdefinedasmarketpricepersharedividedbyannualearningspershare.
GuinnessAtkinsonAsiaPacificDividendBuilderFundManagersMonthlyUpdate–November2017
Economiccomplexityisameasureoftheproductioncharacteristicsoflargeeconomicsystems,usuallywholecountries.Thegoalofistoexplainaneconomicsystemasawholeratherthanthesumofitsparts;toexplaintheknowledgeaccumulatedinacountry'spopulation(thenetworksthatpeopleform)andthatisexpressedinthecountry'sindustrialcomposition.Toachievethisgoal,themeasurecombinesmetricsofthediversityofcountriesandtheubiquityofproductstocreatemeasuresoftherelativecomplexityofacountry'sexports.
Opinionsexpressedaresubjecttochange,arenotaguaranteeandshouldnotbeconsideredinvestmentadvice.Pastperformanceisnotindicativeoffutureresults.
TopFundHoldingsasof10/31/17
1 Li&FungLtd 3.25%2 LukFookHoldingsInternationalLtd 3.10%3 ReloHoldingsInc 3.09%4 LPNDevelopmentPCL/Foreign-NVDR 3.06%5 HanonSystems 3.02%6 LarganPrecisionCoLtd 3.00%7 YangzijiangShipbuildingHoldingsLtd 2.93%8 CatcherTechnologyCoLtd 2.90%9 DBSGroupHoldings 2.83%10 StShineOpticalCoLtd 2.81%
Fundholdingsandsectorallocationsaresubjecttochangeandarenotrecommendationstobuyorsellanysecurity.
DistributedbyForesideFundServices,LLC.