There is More to Investing than Fundamentals

In 2021, news out of China covered a raft of anti-trust legislation levelled against the tech sector backed by numerous fines and most disconcerting, the total annihilation of the After School Tutoring market following an executive order to operate as non-profit organisations.

In February of 2022, Russia invaded Ukraine. A host of companies withdrew from or initiated disposal procedures for their Russian operations. Companies impacted included the global powerhouses of Apple and McDonalds through to SA businesses like Prosus and Mondi. Big losses ensued owing to large asset write-downs or disposals at fire sale prices. High Street had negligible exposure to the region, but anxiety levels rose commensurately with the probabilities of a deteriorating macro-economic picture in China.

By April 2022 amid China refusing to take a firm stance against the Russian invasion and other ongoing US-China hostilities, the scales finally tipped whereby we believed macro concerns rendered promising underlying company fundamentals irrelevant.

Generally, our investment team avoids macro environment forecasts and instead develops a thorough understanding of the business dynamics, which builds our conviction in a share. We long believed that Chinese equities offered compelling long-term returns driven by strong underlying business fundamentals underpinned by attractive valuations. In April 2022, we acknowledged fault and changed tact.

The investment committee decided that High Street would have fully exited China by the start of the Chinese Communist Party’s (CCP) electoral proceedings which were to begin in October 2022. At this stage, quality US growth shares had sunk well into bear market territory on escalating concerns around heightened inflation and the commencement of an impending interest rate hiking cycle. As we have been communicating with our clients, we did not see any major deterioration in the operating performance of these US companies and used the opportunity to switch our Chinese exposure into what we believed to be promising companies trading at overly discounted prices. Interestingly, the year-to-date performance of the Chinese shares sold had fared better than that of the attractive US growth names that replaced them.

This past weekend, 22 October 2022, the CCP’s electoral congress concluded with Xi Jinping securing a third successive term as general secretary. Xi announced his six Politburo Standing Committee members who, together, are the highest decision-making body in the country. All of whom are believed to be Xi loyalists which further reinforces his power at the centre of the party paving the way for him to unilaterally enforce policy. We are not in a position to comment on politics and the accuracy of commentator analysis, but the market was rattled with the Hang Seng Tech Index tumbling by nearly 10% in the first trading session following these events.

We gain comfort knowing that we exited at a price approximately 30 to 50% higher than where they trade today. Chinese shares may eventually stage a rebound, but we sleep easier knowing that investing in regions that uphold shareholder rights and free market governance affords us the opportunity to realise the attractive upside identified in our investment process. Moreover, we are focused on regions where one man cannot render financial analysis irrelevant and unilaterally decimate investor savings with the stroke of a pen. In these instances, fundamentals are once again the primary driver of shareholder returns – a factor we understand and prioritise at High Street.

© High Street Asset Management (Pty) Ltd. All rights reserved | FSP No. 45210 | Legal