Asia Frontier Capital (AFC) – October 2016 Newsletter

AFC Funds Performance Summary

Now that the race for the Presidency of the United States of America is concluded, many analysts are pondering the possible consequences of the outcome of the election for their investments and how to best position investment portfolios for return maximization or risk management. As the US is the most important country in the world right now, the policies of the US government have a far reaching effect. For the frontier markets that we invest in, there are different impacts, depending on the individual country.

Uncertainty is an enemy of market sentiment, as some investors opt to stay in cash or go to cash and only get back into a risk-on mode after stability has returned. With the election of Donald Trump, uncertainty is likely to continue for quite some time, until it becomes more clear to what extent Trump will follow through on the plans announced during the race for the presidency as some of these plans are nationalist, controversial, and perhaps impossible to implement, and might not get the approval of Congress, despite the Congress having a Republican majority.

During the campaign for the presidency, Donald Trump had talked about the renegotiation or cancellation of trade pacts to benefit the US labour force. On the North American Free Trade Agreement (NAFTA), which has already been in place for over a decade, Trump said: “We will either renegotiate it, or we will break it.” He called the Trans-Pacific Partnership (TPP) Agreement a “horrible deal”. He claimed that Hillary Clinton had changed her stance on the TPP as a result of his opinion about it, but actually during the primaries, Bernie Sanders’ ideas may have pushed Clinton to reconsider her support of the TPP.

The TPP free trade pact is an agreement between 11 countries in the Pacific Rim and the US. It is significant as it could raise the GDP for each participating country by 1.1%. In terms of the relevance for our investment universe, Vietnam is a signatory to the TPP and it is interesting to note that China is not part of the TPP. But it is a well-known secret that China would benefit from it as well, through the back door, as China would be able to invest in businesses in trade pact member countries. Besides that, China has already agreed separate bilateral trade agreements with 8 of the 12 countries that signed on to the TPP.

Hillary Clinton, having participated in the negotiations of the TPP, was of course a proponent of the TPP in 2012. In November of that year she said it “sets the gold standard in trade agreements to open, free, transparent, fair trade, the kind of environment that has the rule of law and a level playing field”. In the race for the presidency however, she had changed her opinion and/or public stance as there was a lot of opposition from the public and from her opponents in the race for the presidency, most elaborately voiced out by Bernie Sanders, as it would further support the move of manufacturing jobs from the US to other countries particularly to Asia. It is possible that she changed her stance on the issue to appeal more to the working-class Americans that may be affected by such export of labour, while in competition with Sanders for the democratic nomination.

Trump is also against the imbalance in the current US-China trade relationship. There are numerous issues, but the single most important one proved to be manufacturing jobs in the US. In the Trump Presidency, action to curb the US-China trade deficit could possibly provide opportunities to other Asian countries as effectively Chinese exports to the US would become more expensive. Trading hubs like Hong Kong and Singapore would be impacted alongside China. However, the protectionist policies that can be expected from Trump could also impact trade from frontier countries to the US.

We think that the Donald Trump presidency means that there could be changes in international trade with the US and these changes may also have an impact on frontier markets in Asia. However, these countries also have healthy domestic economies and our investments tend to target companies focused on domestic demand rather than export-driven demand. Though there is expected to be some amount of uncertainty over the next few months, we remain confident on the domestic focused companies that we have invested in. While polling agencies and forecasters have missed the boat in the case of the Brexit referendum, and now yet again during the US Presidential elections, we like to think that we have much better forecasting skills than these pollsters, certainly if you look at our AFC Asia Frontier Fund and AFC Vietnam Fund performance statistics.

This past month AFC received two additional awards:

Investor Review awarded Asia Frontier Capital as the “Best Fund Management Firm – Hong Kong” in their 2016 Single Manager Awards. Investor Review’s press release  talks about the awards selection process and says to “commend those most deserving for their ingenuity and hard work”, which is something we take pride in. The results are there to show that this ingenuity and hard work pays off handsomely. In the face of volatile and difficult periods, the AFC Asia Frontier Fund and the AFC Vietnam Fund have shown superb performance with low volatility and no negative years.

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