In This Week’s Issue…
by Alexander Kalis Managing Partner & Head of Investments at Milltrust International

 ​The first acceleration by China’s giant economy in seven years kept stocks near record highs on Thursday, but added to growing pressure on bond markets as U.S. Treasury yields, the benchmark for global borrowing costs, reached a 10-month high. Underlining the momentum of the world economic expansion into the back end of last year, both Chinese fourth quarter growth of 6.8 percent and December industrial output growth of 6.2 percent were ahead of expectations. Milltrust remains Overweight the country.

Supportive of our Milltrust Keywise China Fund‘s heavy Tech exposure, the Financial Times reported that Chinese gaming companies now dominate their home country, with overseas companies losing out to domestic rivals in the world’s largest video games market as consumers increasingly shift from PCs to mobile phones to play.

Finally, China wants to dominate the world’s green energy markets. If China becomes the global leader in renewables it will have huge influence across the world. China’s response to climate change combined with the size of its economy has thrust it to the centre of a global shift. Large-scale funding through Chinese-led multilateral frameworks could see a new energy system emerge – led by China. This would greatly extend its influence on the international political economy at the expense of those major powers unable or unwilling to respond.

In India, the market has been on a dream run with benchmark indices gaining 29 percent in the calendar year 2017 in absolute term. The good news is that the rally is not over yet and in the first 3 weeks of the calendar year 2018, we saw Sensex hitting a record high of 35,000 and Nifty rising above 10,800.

India’s market capitalisation/GDP ratio now hovers around the 100-mark, a valuation indicator which suggests that the market is going into the overvalued zone. Any value above 100 could be described as overvalued. At Milltrust, we remain Neutral for our investments in India.

Source: MoneyControl, 18 Jan 2018

In Southeast Asia, the investment managers of Milltrust’s 5-star Morningstar rated Milltrust ASEAN Fund remain positive on the growth prospects of ASEAN economies in 2018 which they argue will be driven by (1) fiscal policy support and spending and (2) export growth in the region which will spill over to domestic demand.

They expect to see increased infrastructure and government spending in South East Asia especially in Indonesia, Philippines, Malaysia and Thailand as infrastructure plays a crucial role in the region’s economic, social and environmental development including boosting regional connectivity. The national elections expected to be held in Malaysia and Thailand and regional elections in Indonesia in 2018 should also see increased government consumption and spending on the lead up to the elections.

They also expect the strength in export growth in the region to spill over to domestic demand recovery. While the growth surprise in 2017 has been mostly export driven and domestic consumption growth has been patchy, they expect the growth cycle to broaden from an export recovery to a domestic demand recovery in 2018. Capacity utilization should improve and lift capital expenditure which in turn should generate employment, higher wages and support consumption.

Valuations have continued to be more demanding compared to the start of last year, trading above their long term averages. However, valuations could moderate to more reasonable level if higher earnings growth and potential upside surprises materialize in 2018. At Milltrust we remain Neutral on the region for the time being.

In Latin America, Scott Piper, investment manager of Milltrust’s 4-star Morningstar rated Milltrust Latin America Fund, continues to favour Brazil over the other relevant markets in the region due falling inflation, falling interest rates, economic recovery and earnings growth in the country. The 3rd quarter earnings season and the sales data for the Christmas holiday reinforced estimates of strong earnings growth for the Brazilian equity market in 2018.  The manager has been less optimistic about the outlook in Mexico because of the macroeconomic challenges described in previous Milltrust Alert newsletters. As for the Chilean market, the outcome of the presidential election is welcome news and bodes well for a much better outlook in terms of economic activity and investment opportunities going forward, but for the short term valuations of the Chilean equity market are unsupportive. Milltrust has become Mildly Overweight the region from Neutral previously.

In the Middle East, Saudi Arabia’s government expects record spending to deliver a strong economic rebound in 2018. Economists say it’s too optimistic, with officials underestimating the impact of new taxes, subsidy cuts and oil prices. Milltrust is Underweight the region.

In Africa, new Zimbabwe president, Emmerson Mnangagwa, has a plan to revive one of the world’s worst-performing economies and end its isolation: pay compensation to white farmers whose land was confiscated, sell bonds to rebuild infrastructure and hold internationally acceptable elections.

Finally, in Russia, the Russian benchmark stock index climbed to an all-time high on Thursday, catching up with the gains of major global peers and buoyed by favourable oil prices, which also supported the rouble. Russian assets have been on the rise so far this year as prices for oil, one of their major drivers, recovered to levels last seen in late 2014.Milltrust is Overweight Russia.

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