CRUX Asia ex-Japan Fund 2022 and the outlook for 2023
The last 12 months has been a perfect storm for growth investors. Working out where valuations should have been has been hard to judge with the geopolitical uncertainty and interest rate rises that have followed the loosest monetary policy in recent history. And now we have one of the worst bear markets in 20 years. We partly saw this coming last year, especially in China, but returned early to the market before it bottomed out.
Importantly, China’s economic growth has taken a knock this year. A brewing property market crisis, high youth unemployment and the impact of lockdowns on manufacturing have taken a heavy toll.
In 2023, there will be a bull market in Asia. There will be hesitance to buy into it because of geopolitical uncertainty but we are past the bottom of low valuations and price
China will undoubtably be the main focus. We expect pragmatism to prevail in relation to the Zero-Covid policy in an attempt to restore economic growth. Following anti-lockdown protests at the end of November, we are already seeing a shift towards pragmatism with a ‘0.5 Covid’ policy, where lockdowns are being lifted despite cases rising.
We are confident that China’s economy will improve. Despite recent American protectionist policies that will impact China, the relationship between the rest of the world and China remains one of mutual economic interdependence. We don’t see this economic interdependence ending anytime soon.
In 2023 and beyond, Taiwan’s semiconductor industry will remain of critical importance to world markets. Since TSMC controls 60% of the world’s semiconductor market, China will be forced to be practical in its approach given how microchips play an ever increasing critical role in economic modernisation.
Trends and themes in the portfolio
The greatest market opportunities will lie with the ‘electrification of everything’ – digitalisation across the economy will continue at a more rapid pace into 2023.
Electric Vehicle (EV)-related stocks, especially Chinese, are a significant proportion of the portfolio. They will form a major part of the electrification of everything, driving significant sales increases which will show current valuations to be mispriced.
At present, China sells 60% (2022 estimated) of the world’s cars, and domestically 13% in 2021 and 25% in 2022 (estimated) sales were in EVs, representing a 120% growth on last year. Within four years, 70% of all cars in China will be EVs and their cost will fall because China has the lowest cost EV-manufacturing ecosystem in the world.
One stock that captures the sudden growth of EVs in China is Li Auto, which has seen sales increase from zero to 120,000 within four years. EV companies also benefit from requiring fewer components than ICE vehicles and therefore will likely see earnings grow quickly.
Finally, the Chinese market still presents a good investment opportunity. China is tightly -integrated into the world economy and geopolitical uncertainty has, on the whole, already been priced in.
2022 has been a bumpy year and we have witnessed the worst Chinese bear market in 20 years. However, despite geopolitical tensions, pragmatism will prevail and we anticipate a bull market in 2023, driven by the ‘electrification of everything’. In our portfolio, this means we are targeting Chinese EV stocks in particular.