During the September quarter we have witnessed increasing economic and political uncertainty. This has resulted in a significant increase in equity market volatility and weakness around the globe.
Despite significant declines in Asian equities, our Martin Currie Asia Pacific Real Income (APRI) portfolios rose into this market weakness, highlighting the low volatility / low beta characteristics of the portfolio’s design. However, this recent strength does not diminish the potential for future returns as lockdowns and social restrictions ease as vaccine rollouts continue.
Portfolio design provides low volatility outcomes during uncertainty
Our investment process, which focuses on delivering a low-risk outcome, targets Real Assets, which are the ‘every day-use’ building blocks of the economy. Growth for these Real Assets is driven not by any business cycle but by the structural mega trend of urbanisation which remains significant in the Asian region. As part of our low-risk approach, we specifically screen out companies with greenfield or development risk and favour income payers with stable cash flows.
This approach has kept APRI well away from volatile cyclical Chinese property developers, and names such as Evergrande. In fact, the problems at Evergrande have potentially refocused investors’ attention towards the higher quality proven Real Assets that the strategy owns.
Whilst the APRI portfolio was left behind in the 2020 bull market, the strategy’s low beta means it is well positioned to perform during times of market uncertainty or market weakness. APRI’s resilience during the recent significant market weakness was not only a standout in Asia but also on a global scale against global equities, infrastructure, and property indices.
Monthly and quarterly returns for September 2021 (%)1
APRI’s resilience during the recent significant market weakness was not only a standout in Asia but also on a global scale.
Despite the dislocation in markets over the last quarter, we are seeing signs of the ‘re-opening’ trade getting closer and gathering pace. We see this re-opening theme as having significant upside in the Asia Pacific Region, as many Real Assets are still trading well below their pre-COVID-19 levels. This is particularly apparent in Real Asset sub-sectors such as transport infrastructure (i.e., toll roads / rail / ports) and retail REITs.
Toll road re-opening
Toll roads showed noticeable declines in traffic volumes during lockdowns, however once restrictions were eased volumes have recovered rapidly.
For example, Transurban-owned and operated toll roads in Melbourne faced more significant social restrictions in the June quarter whereas Brisbane did not. As you can see in the chart below, Brisbane volumes have rebounded above and beyond their pre-COVID June 2019 levels, while Melbourne was still lagging.
Transurban average daily trips: June quarter 2021 relative to June quarter 20192
“Since the end of the financial year we have seen restrictions reimposed in Sydney, Melbourne and Brisbane, impacting traffic across all three regions.
Fortunately, experience has shown us that traffic rebounds quickly when restrictions are lifted although the rate of recovery depends on the length and nature of ongoing restrictions.”
Scott Charlton, CEO, Transurban (Australia)
FY21 results announcement
9 August 2021
With vaccination rates rising rapidly in Melbourne during the September quarter and into October, the Government has already begun gradually loosening social restrictions. We believe this will lead to much better Melbourne data ahead, similar to the growth already being seen in Brisbane.
This theme is also prevalent in China, with Yuexiu Transport Infrastructure reporting steadily improving business and profitability gradually returning to pre-pandemic levels3.
We also believe there are strong structural tailwinds around toll roads as discussed in our blog, Come Drive With Me: Four Reasons Why the Road to Income Recovery Includes Tolls.
Retail REIT re-opening
Retail REITs have shown noticeable declines in sales in lockdowns, however once social restrictions are eased, retail sales are recovering very rapidly.
For example, Singaporean shopping centre landlord Frasers Centrepoint has reported tenant sales are on track to recover back to pre-COVID levels given restrictions have been easing in Singapore.
Frasers Centrepoint tenant sales as a percentage of the FY19 average4
“Both shopper traffic and tenants’ sales recovering in July 2021 with the progressive easing of the safe distancing measures by the Government. Further easing of the measures bodes well for retail and will further support FCT’s portfolio performance.”
Frasers Centrepoint (Singapore)
Citi-SGX-REITAS REITS/Sponsors Forum 2021
24 August 2021
We are also seeing similar trends in other parts of the Asia Pacific region (e.g., Hong Kong China and Australia), with positive results being reported from the likes of Scentre Group, Vicinity Centres and Link REIT.
“Visitation rapidly rebounded when restrictions were eased. Customers want to return to our Westfield Living Centres as what we offer is integral to their lives.”
“In those locations impacted less by lockdowns, we have seen trading conditions better than those experienced in the first half of 2019.”
Peter Allen, CEO, Scentre Group (Australia)
FY21 results announcement
24 August 2021
“[In Hong Kong,] retail sales showed signs of recovery in the first quarter as a result of gradual relaxation of social distancing measures.”
"[In mainland China,] healthy tenant sales since April have seen sales gradually recovering to >90% pre-COVID levels"
Link REIT (Hong Kong)
Our confidence in the upside
Our confidence in the upside for APRI is due to increasing evidence of mobility, volumes and sales seen for Real Assets in the counties and cities where re-opening has already occurred.
The APRI strategy has approximately 40% of the portfolio in transport infrastructure and retail REITs5. These sectors were hurt by lockdowns, and we believe that they will benefit from re-opening.
As the vaccine rollout progresses, and social restrictions and travel restrictions are eased, we are already seeing a strong re-opening recovery in earnings and dividends.
Now is truly the time to capitalise on these themes, before the re-opening is complete, as it will not be long until the share prices of these higher quality Real Assets stocks begin to reflect this opportunity and narrow the valuation gap.
Past performance is not a guide to future returns. The return may increase or decrease as a result of currency fluctuations. The investment vehicles shown may have different risk profiles and a direct comparison may not be appropriate.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable.
1Source: Martin Currie Australia, Morningstar, FactSet; as of 30 September 2021. Martin Currie Australia (MCA) claims compliance with the Global Investment Performance Standards (GIPS®).
The Asia Pacific Real Income composite (EQ_17) contains fully discretionary accounts containing diversified portfolios of Asia Pacific ex Japan real estate investment trust, utility, infrastructure and like securities that are listed on an Asia Pacific ex Japan-based Stock Exchange.
For purposes of compliance with the GIPS®, the Firm is defined as Martin Currie Australia (“MCA”) formerly Legg Mason Australian Equities (LMAE), and comprises all assets managed or advised on a discretionary or non-discretionary basis. MCA is a division of Franklin Templeton Australia Limited (FTAL), which is a part of Franklin Resources, Inc.
MCAs predecessor firm for GIPS® purposes, was FTAL, which was known as Legg Mason Asset Management Australia Limited (LMAMAL) prior to 1 October 2021.
The MCA team continues to manage the Australian domestic equities portfolio of FTAL. The US Dollar is the currency used to express performance. Returns are presented gross of investment management fees, custody fees, administration fees, tax and net of trading expenses, and include the reinvestment of distribution income. Returns are presented net of non-reclaimable withholding taxes.
GIPS Reports and/or the firm's list of and description of composites and limited distribution pooled funds and list of broad distribution pooled funds can be obtained by contacting firstname.lastname@example.org. Inception date: 30 June 2016.
GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.
2Source: Transurban; as of 9 August 2021, FY21 results announcement, available from https://www.transurban.com/content/dam/investor-centre/01/FY21-ASXRelease.pdf
3Source: Yuexiu Transport Infrastructure; as of 8 August 2021, 2021 interim results presentation, available from https://doc.irasia.com/listco/hk/yuexiutransport/cpresent/pre210810.pdf
4Source: Frasers Centrepoint; as of 24 August 2021, Citi-SGX-REITAS REITS/Sponsors Forum 2021 presentation, available from https://fct.frasersproperty.com/newsroom/20210824_211630_J69U_5904MZ61UPZFQABI.1.pdf
5Source: Martin Currie Australia, as of 30 September 2021. Data calculated for the representative Martin Currie Asia Pacific Real Income portfolio