The Tantallon Asia Impact Fund closed 0.91% lower in October with a healthy dose of Omicron panic and the mounting unease over further regulatory crackdowns and the unravelling of the heavily indebted property sector in China, aggravating markets caught on the back foot with US Fed Chairman Jerome Powell signalling a more aggressive tapering schedule.
We expect markets to remain volatile over the next few months although Asia’s self-sustaining economic recovery and productivity dynamics are broad-based and have legs.
As vaccination rates pick up across Asia and “living with Covid” becomes the cornerstone for more policymakers, we are encouraged by the data on exports, private industrial capex, and recovering employment and consumption, which is comparable to the 2003– 2007 investment cycle in Asia.
As short-term fund flows are being driven almost entirely by positioning for the yearend in the quest for the last basis points of performance; a more fundamental approach can just wait for the New Year.
However, Omicron has muddied the waters. The good news and bad news is reduced virulence and hospitalisations but increased transmissibility. That said, we simply do not have adequate data yet to reasonably hypothesise viral loads on healthcare systems and potential lockdowns, economic impact or implications for fiscal and monetary policies.
Inflation and inflationary expectations are stickier than most have expected and we forecasts most central banks to “taper” and “tighten” over the next 18 months.
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We should also expect strained geopolitical fault lines, strident rhetoric and posturing in the lead-up to the Congressional Elections in the US and the 20th National Party Congress in China.
New supply chains in 2022/2023
Thematically, we are invested in beneficiaries of China+1 as global supply chains continue to diversify away from their dependence on China, the de-carbonisation and electrification of value chains, supply-constrained future-facing commodities, and sustained brand, technology and manufacturing moats across Asia.
“Reopening” export-focused infrastructure investments and industrialisation, accelerating new job creation, and urbanisation and consumption anchor our conviction in India and Asean.
We do expect significant policy action, including the use of explicit policy-easing and nationalisation, to “contain” China’s property crisis, allowing for an economic reset on the back of more infrastructure spending, de-carbonisation incentives and investments, and domestically-oriented consumption.
For all the angst over the last several months, Beijing has somehow managed to “cushion” the China Evergrande “default” and the focus seems to be on ensuring an orderly restructuring for heavily indebted property companies as was the case with HNA, minimising contagion for the sector and for the domestic bond market broadly, and crucially, avoiding a cascading spiral for asset prices.
We are not being dismissive of the ongoing Covid risks.
Our view is that Covid virus mutations will likely continue to challenge current vaccination efficacy as long as we have significant unvaccinated communities — either because of the lack of access to vaccines or on account of obdurate vaccine resistance.
The competing imperatives of “zero-Covid and lockdown” strategies and “reopen and adjust” will therefore translate to “uneven” growth across geographies over the next two to three years.
At this point, we are most watchful with regards to collateral damage if China’s property sector woes are not systematically and decisively contained, and the US Fed, in particular, losing control over the inflation/tapering/tightening narrative.
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On the road to electrification, the new Holy Grail is “Safer, Further, Cheaper!”. Regulators, consumers and OEMs are singing from the same hymnal. The debate has moved well past the “Why?” and “ How much to subsidise?” to “How safe?”, “How far?” and “How affordable?”.
The focus is squarely on (1) Branding — thank you Tesla; (2) solving for complex chemistries to deliver scale, range, reliability and cost-efficiencies while dealing with highly combustible compounds; (3) addressing supply-side constraints for key input commodities, components and charging infrastructure; and (4) meeting regulatory demands on specific de-carbonisation and emissions goals despite competing nationalistic agendas and inadequate funding and infrastructure.
China has been extremely successful in implementing intentional electric vehicle (EV) and EV battery policies to sustain an integrated, low-cost supply chain, investing heavily in honing decades-old lithium iron phosphate (LFP) battery technology (as opposed to the more expensive and more combustible nickel-cobalt-manganese alternatives) and building scale manufacturing.
Global OEMs from Tesla to VW and Hyundai are increasingly dependent on an integrated Chinese battery supply chain operating at scale, to deliver on product safety, range and reliability, and greater affordability.
Stock highlight
The stock we would like to highlight this month is BYD Company, a diversified, electric vehicle and battery manufacturing/storage company, poised to leverage its fully integrated EV platform to scale production as China accelerates its transition to EV, with the specific intent of eliminating combustion engines sales by 2035. Our expectations are significantly more robust than market consensus.
We expect EV to account for 35% of new vehicle sales in China in 2025, up from about 13% this year, with BYD doubling its sales volumes to a million units and market share to about 15% over the next three years on the back of a slew of attractive new product launches, improving brand/dealership network, and cost competitiveness.
As the second-largest Chinese electric battery manufacturer behind CATL, BYD will be a significant beneficiary of global OEMs ramping EV production on the back of Chinese LFP battery technology. Given the significant improvements in terms of safety, size, weight and range, and the cost competitiveness of BYD’s new Blade Battery system, we are comfortable projecting BYD ramping EV battery capacity utilisation from 50% to 75% over the next three years, with external customers accounting for 40% of volumes, up from 10% currently.
As we continue to refine our data-driven assessment of “impact”, evaluating sustainability, innovation, societal trends, and material environmental and governance initiatives across Asia, we have conviction in our framework and our outlook. We are looking to take advantage of market volatility to increase our exposure to:
- China+1 as global supply chains actively diversify across the region, there are significant opportunities in industrialisation, automation, infrastructure, housing, discretionary consumption and healthcare spending.
- Persistent supply-side constraints in sustainably sourced “future-facing” commodities.
- A steepening yield and well-capitalised, over-provisioned financial institutions executing on profitable digital and customer acquisition strategies.
- De-carbonisation, renewables and the EV value chain.
- Domestic brand leaders.
The Tantallon Asia Impact Fund is a fundamental, long-biased, Asia-focused, total return opportunity fund, registered in the Cayman Islands and Mauritius. The fund invests with a three-to-five-year horizon, in a portfolio with strong conviction on the structural opportunity, scalable business models and in the management’s ability to execute. Tantallon Capital Advisors, the advisery company, is a Singapore-based entity and holds a Capital Markets Service Licence in Fund Management
Photo: Bloomberg
