We spent last week in the office in Hangzhou at the offices of our parent company ZHEJIANG ZHONGNAN HOLDINGS GROUP.  (ZZHG)

Hangzhou is a stunning city, 130 miles south west of Shanghai and is the capital and most populous city of Zhejiang province in east China.  It is an emerging technology hub and home to e-commerce giant ALIBABA.  It is also the province from which Xi Jinping hailed and was governor 2002 through 2007. It hosted the G20 summit in 2016 and will become the third Chinese city to host the Asian Games after Beijing 1990 and Guangzhou 2010.  In ancient times it was the heart of the Song dynasty while Venetian trader Marco Polo described Hangzhou in the late 13th century that the city was “greater than any in the world” and even then, it was speculated upon that the city had a population of 1m people.

ZZHG itself is a successful diversified conglomerate with US$2.5bn of annual revenues and a AA credit rating awarded it by Asian ratings agency Dagong.  It is active across a range of industries and established in Zhejiang province since 1984 and a leader in several industries in technology through building materials to media and now a growing presence in asset management.  It owns us via its UK subsidiary company ZZ UK and whose UK name “South River” reflects the region (Zhejiang) and Zhongnan meaning south.

The province of Zhejiang and the bordering municipality of Shanghai comprise 80m people with a GDP per capita of US$15,000 and threading between Hangzhou and Shanghai on an express train in airconditioned comfort takes an hour and costs RMB100 (or less than $20).

China itself continues to exhibit signs of strong growth across the board and better still is managing the transition from a primarily manufacturing led economy to services led one much better than anyone had anticipated.

Investment themes current in China range from working to improve air purity to the electrification of transport through to further urbanisation in tier 3 and tier 4 cities a big discount to the overhyped US stock market but only in line with global market averages. We remain quite positive on Chinese asset markets but in particular, corporate income and domestic equity which is potentially undervalued.

In portfolios we continue to be very positive on both Chinese debt and equity with an underlying 15% in the model.  For example, trading house TEWOO (investment grade BBB rating raised circa $500m last month at 5.8%) and this is attractive to us when investment grade in the States and UK/Europe is trading at close to 2%.

Closer to home please see a summary of our latest investment views:

Highlights:

  • We remain broadly diversified with above average levels of liquidity and a focus on sustainable yield
  • We have initiated an exposure to European banking, participating in a fund raise by Italy’s tenth largest bank CREDITO VALTELLINESE and funding it via the sale of our holding in ARIX BIOSCIENCE in which we booked a small profit
  • Our primary exposure to banks is in the “preferred” asset class via the iShares Preferred etf (yielding a net 6.25%). This is an asset class we favour.
  • We continue to give some relative performance ground in Feb by virtue of our low weighting in US large cap tech. (now 20% of equity indices).
  • A Global Mena special dividend of approx. 12 pence per share should be paid by end March. This amounts to between 0.5% and 2.5% of each sub-fund.
  • Results from individual holdings have been generally in line with estimates. Our exposure to infrastructure via BALFOUR BEATTY and KIER GROUP reported strong cash flow, winning business as expected from the demise of CARILLION.  In resources, a sell-off in our holdings in YAMANA shares detracted while we added to RESOLUTE MINING whose management we recently saw and whose shares we believe are undervalued.

Markets Background

Markets overall have been in a tight trading range so far year to date. US President Trump’s aggressive moves to raise tariffs on imports of steel and aluminium (25% and 10% respectively) has raised the fear of more to come and seen European manufacturers in particular sell off as the EU proposed tariffs on incoming US goods like foodstuffs and leisure goods.

In Asia the National Party Congress in Beijing approved President Xi Jinping’s extension to his mandate, while Vladimir Putin was sworn in as Russia’s president for the third time.  Japanese political turmoil surrounding Finance Minister Aso paradoxically had the effect of strengthening the yen, while in Europe Italian elections resulted in no clear-cut winner.

Equity market rallies are being led by US large cap tech and emerging markets with AMAZON and NETFLIX at all-time highs while Brazil and Russia tacked on 10% ytd.  MSCI World has recovered half its February swoon when it lost 9.8% from top to toe in its US interest rate inspired sell-off but it remains in a tight trading range.

Against this background we continue to see interest rates moving gradually higher and a period of quantitative tightening eventually replacing quantitative easing.

Thematically the move to growth industries in alternative fuels (electrification of transport) investment in alternative metals for automobiles and new composite materials to replace older industrial ones are all part of the increasing use of technological innovation driving growth.  Cybersecurity as highlighted by the attacks on networks in the US and Europe recently and the need to protect nascent industries are important to understand the implications of. DYSON for example has recruited 400 engineers in Malmesbury, Wiltshire and are investing heavily in their new project to build a bespoke electric car.

Defence and energy infrastructure issues have also been highlighted by the recent spat the UK government has had with Russia over the poisoning of a Russian former spy on UK soil and the takeover for industrials giant GKN has taken on an added dimension on the back of this.

M&A has also been touched by these issues with the Trump administration blocking the proposed merger between BROADCOM and QUALCOMM.  Cybersecurity too becomes a key issue globally and BROADCOM’s base in Singapore was seen by some in the US administration it seems as heightening the Chinese competitive threat.

That’s it.

Have a good w/e

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