LO Funds
Asia High Conviction

PERFORMANCE COMMENT

The MSCI Asia ex Japan gained 1% in February. Chinese equities were the standout performers in the month, with the MSCI China recording a massive 11.7% gain. The Consumer Technology and Industrial sectors led the rally as positive developments around AI, robotics and EVs all came together to drive up positive sentiment on Chinese equities. The rest of Asia was rather muted. The MSCI Taiwan was down 4.8%, partly due to the rotation from Technology hardware manufacturing to Chinese Consumer Technology platforms and the semiconductor supply chain. India had another weak month, with the MSCI India declining 8%.

The LO Funds–Asia High Conviction P and N share class outperformed the benchmark meaningfully during the month.

MACRO REVIEW

February was all about China. The resurgence of optimism in the Chinese Technology sector, driven by growing enthusiasm for AI and robotics, led to a re-rating of IT and internet stocks. President Xi’s meeting with top tech firms—the first since November 2018—signalled renewed government support for the sector. Additionally, Alibaba’s stronger-than-expected 4Q24 results and its ambitious AI capex plans further bolstered investor confidence, underscoring the sector’s potential for long-term growth. In the property market, signs of stabilisation in tier-1 cities such as Shanghai and Shenzhen, coupled with the restructuring of Vanke, helped alleviate concerns of a broader fallout. These developments provided a much-needed boost to market sentiment, particularly in sectors tied to real estate and construction. The release of the US’ “America First Investment Policy” on 21 February and the unexpected imposition of an additional 10% tariff on Chinese goods on 27 February triggered a minor market pullback as it reignited fears of escalating trade tensions. However, the resiliency of Chinese equities and the continuous buying support from southbound flows suggest that local investors are finally feeling much more confident in the economy’s ability to weather potential headwinds, having become a leader in technology and with years of preparation to wean itself off reliance on US trade. Looking ahead, all eyes are on the National People’s Congress (NPC) meeting in March. Investors are keenly awaiting policy announcements that could provide further clarity on China’s economic priorities, particularly in areas such as consumption, technology innovation, and fiscal stimulus. The NPC’s emphasis on these themes is expected to shape market sentiment and drive sectoral performance in the coming months.

PORTFOLIO ACTIVITY

During the month, the Fund added to high-conviction positions in our Chinese platform technology and robotics-related companies. We also increased our exposure to the Chinese Technology hardware sector with the addition of new names Shennan Circuits and Will Semiconductor.

TOP PERFORMANCE CONTRIBUTORS/DETRACTORS

Top performers for the month included Tencent, Alibaba, BYD and Lenovo as Chinese technology outperformed all other sectors and markets significantly.

Trip.com was a main detractor. While results were solid and in line with expectations, the stock was sold off on management’s plan to invest more aggressively in overseas markets, which could slow its profitability improvement thesis. We took the opportunity to buy more on weakness as we think the strategy of doubling down on international markets to drive mid- to long-term growth will further accelerate market share gains and lead to huge profit upside over the next 2-3 years.

The narrative of US exceptionalism has grinded to a halt. The market has started to realise and price in the risk of Trump’s policies for US economic growth. While Asian economies may sneeze when the US catches a cold, the reality is that they are far more prepared now than during Trump 1.0 to overcome the uncertainties caused by US policies. China’s economic stabilisation and the structural transformation towards high-quality and less cyclical growth in the next decade, led by technology, emerging local and global brand champions will continue to take shape regardless of the US government’s antics. China’s improving trade relations with the global south will also be beneficiary to emerging Asian economies. India, while undergoing a cyclical slowdown, is still going to be a major economic powerhouse in the years to come with opportunities from industrialisation, urbanisation and growing middle-class consumption. The long-term outlook for Asia equities remains very bright, with valuations still at a compelling level relative to developed market equities.