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In the past two years, investors in China have faced challenges from policy reforms, Covid-19, and commodity price inflation.

That would perhaps be an accurate description of what drove some of my portfolio decisions as a young fund manager, roughly 15 years ago during the global financial crisis (GFC) meltdown.

The performance of the FSSA Japan Equity strategy has been under pressure year-to-date, driven by a violent style and sector rotation from quality growth to financials and cyclical companies.

In this China update for mid-2022, we discuss some recent topics of interest as highlighted by our clients.

China’s e-commerce and online services were among the few bright spots against the dismal economic backdrop this year.

We often hear this comment from prospective clients who are considering an investment in the FSSA Indian Subcontinent strategy, but are not yet convinced that a dedicated allocation would indeed be worth it. Call us biased, but we have been arguing in favour of a standalone investment in India for many years.

FSSA Investment Managers has been investing in Asia and global emerging markets for three decades.

China made headlines for watering down coal reduction targets during COP26, but we think the criticism is unfair.

2021 will be a year of recovery. This is not surprising given last year’s economic downturn. If vaccines are being rolled out gradually during the year, we believe the economy will recover, especially those sectors that have been hit hard like travel.

What is your view on the tightening regulations on Chinese tech companies? What are the impacts on the companies in the holdings (Tencent, Alibaba, JD.com) and do you see it as a structural headwind for the sector or an accumulation opportunity?

While the pandemic is still far from over, a number of key leading indicators point to a healthy and broad-based recovery in China.

The country’s biggest bricks-and-mortar grocery chains are fighting back against online competition.

Over the past few years, global emerging market (GEM) investors have dealt with a series of challenges, including a surging pandemic, local lockdowns and widespread travel restrictions.

Mutations, it would seem, are not unique to the virus. Starting with some housekeeping, we always end our letters seeking feedback from our regular readers.

Since our last update, global markets have not been short of action and the manic behaviour characterising today’s markets has taken investors on another rollercoaster ride.

In almost every meeting that we have with management teams, we will ask about incentivisation. In our view, it is an important question and the answer can be highly revealing about an organisation’s culture and behaviour.

Penetration rates for goods and services are low and the high level of informality in emerging market countries often raises the barriers to entry substantially.

Albert Einstein famously said, “Not everything that can be counted counts and not everything that counts can be counted.” This holds true in many situations, but we think it is especially true when it comes to risk management.

In our last client update, written through the depths of Covid-despair, we observed that real life and the world of markets are seldom so intimately entwined.

The FSSA Singapore & Malaysia Growth strategy was renamed the FSSA ASEAN All Cap strategy in December 2021 to reflect a change in the portfolio’s mandate. The strategy is now able to invest in the broader Southeast Asia universe.

As the world continues to lurch from Covid-surges to reflexive and localised lock-downs, everybody is now looking through to a mythical status quo ante bellum – the before-Covid-times, when the world was just hunky-dory.

As Asian countries become richer, they have been transitioning towards consumption-based economies, translating higher per capita income into increased spending across goods and services.

Though Covid hasn’t yet finished with us, the markets have finished with Covid. In real life, there is still plenty of misery to go around, but things have seldom been better for investors.

Every downturn is different – the Global Financial Crisis and the Asian Financial Crisis were primarily debt-related, while SARS and Covid are obviously health-related, with a knock-on effect on growth and consumption.

In boom times like today, when cash costs nothing and capitalisation rates are zero, everybody is focused on growth and the future.

As with global automotive manufacturers, several Indian automotive original equipment manufacturers (OEMs) have recently announced that the shortage of semiconductor supply has impacted their production schedules.

We have just returned from India – the first investment research trip in India for our entire team in over two years. It was a liberating break from constantly hearing “You’re on mute!” on video calls whilst simultaneously being forced to appreciate your kids’ music lessons in the adjoining room.

Every company we speak to these days tells us about the cost pressure that they are facing, emanating from rising global commodity prices.

50x P/E! 70x P/E! 100x P/E! Valuations that were outrageous just a few years ago are commonly bandied about by most of the investment community these days. But, ask any respected business owner and they would shake their head in disbelief. The difference in perspective is critical.

Corporate India’s resilience has been severely tested over the past decade. Since 2010, there has been a long, drawn-out downturn, caused by a series of corruption and scams, a banking and financial crisis, and now a devastating health pandemic.

After a recent meeting in Mumbai with the top management of Mahindra & Mahindra (M&M), we came back with a clear message – M&M’s commitment to its purpose does not mean that it will continue to operate loss-making businesses.

Land, Labour, Capital and Entrepreneurship. These are the well-known “Factors of Production” as defined by classical economists. The Entrepreneur (or Company) is the one that combines these factors to earn a profit.

We have closely followed earnings across our portfolio companies to assess how successfully they have emerged from the initial impact of the pandemic.

Our investment philosophy is to back owners and managers with whom we feel strongly aligned, and track records of treating all stakeholders fairly.

At a team discussion last month to track management and board changes across our investment universe, a notification on the stock exchanges piqued our interest.

As bottom-up investors, the FSSA team carry out well over 1,500 meetings each year to assess company managements’ capabilities and the underlying strength of the franchises they run.

As the saying goes, “There are two kinds of forecasters: those who don't know, and those who don't know they don't know.”

As disposable incomes have grown, we find that Indian consumers are now moving up the ladder to buy more premium products, or buying discretionary products they could not previously afford.

This time, we want to talk about why new listings are important to keep the market vibrant and to keep the entrepreneurial spirit in the country alive.

Year to date, 34 companies have listed on the Indian exchanges raising a total of USD7.2 billion, a figure which has been surpassed in India only twice before in the last 12 years on an annual basis.

Given inflation levels are picking up around the world, why is this not a problem in Japan? There are fundamental differences in Japan’s economy to explain this. First, underlying consumption has stood still in the past decade or so.

Looking back over 2020, a challenging year for many reasons, there were two key investment decisions that helped the performance of the FSSA Japan Equity strategy.

With one of the oldest populations in the world, Japan has been planning for a future with fewer workers and more retirees for sometime.

At FSSA, our investment approach focuses on identifying high-quality companies with strong management teams, dominant franchises and conservative financials.

In our last client update, we discussed the reasons we resisted the temptation to switch into pure cyclicals and so-called “value” stocks — even though we had anticipated a sector rotation in the market.

With over 20 years managing money in China I have seen significant changes both in the corporate and investment environment. One of the biggest shifts that has occurred is the fact that China is not short of investment capital.

Ten years ago last month, I assumed lead management responsibilities for the FSSA Indian Subcontinent strategy. How time has flown!

Many people seem to think that money management is about predicting the future. But even with the gift of perfect foresight, the subsequent market reaction to news is often far from obvious.

How is the FSSA Asian Growth portfolio positioned in light of the challenging market environment? Firstly, we should note that we are agnostic about indexes.

Since we last wrote, roughly three months ago, investors in emerging markets have had to reconcile themselves to a stream of disappointing headlines from several key countries.