Aitken Investment Management (AIM) is an Australian based global investor and clearly getting the direction of the Australian dollar right in terms of whether we are hedged or unhedged (or somewhere in between) plays a key role in overall returns to our Australian investors.
In January, the Australian Dollar rose +5.2% vs the US dollar and thankfully the AIM Global High Conviction Fund was fully hedged during the month, negating the clearly negative performance translation effect of such a strong rebound in the Australian Dollar.
We remain fully hedged as we enter February feeling that the US Dollar is a crowded long (and the Australian Dollar a crowded short), with the Trump administration actively trying to talk down the US dollar to improve America’s competitiveness. The Federal Reserve considering shrinking the size of its debt portfolio is also a USD headwind.
Similarly, we believe the price action in commodities and all things China means the risk to the Australian dollar are to the upside. For example, the last time the spot iron ore price was $83t, the AUD/USD cross rate was 84usc. Ditto the copper price. The chart below illustrates the correlation between iron ore, copper and AUD/USD. It clearly shows if iron ore and copper prices hold these levels then the AUD/USD cross rate could easily rise to the 80 to 85usc range. Remember, we are the “commodity currency”.
It’s also worth noting the technical picture for the AUD/USD cross rate on a 5-year view. The chart below confirms the 50,100 and 200-day moving averages have been broken to the upside. The downtrend from 105usc is breaking and the momentum is turning up.
We don’t share the consensus view that the AUD/USD is heading to 65usc. We think the opposite is happening. We believe the easy yards of simply investing overseas unhedged as an Australian to generate positive AUD returns are behind us. In fact, we believe unhedged global investors based in Australia will find it much tougher from here if we are right and the AUD/USD tracks higher. January was a clear example of this.
In January, we generated positive returns with our Chinese investments in Hong Kong. The HSCEI Index rose +4.36% in January, outpacing all developed markets and the negative –0.8% return from Australia’s ASX200.
The weaker USD drove rotation to emerging market ETFs (EEM.US), which in turn saw strong demand for the cheap and under-owned H share market in Hong Kong. The AIM Global High Conviction Fund ran a net long in H shares in January, with our biggest investments being Tencent, Ping An Insurance and Wynn Macau.
We believe this trend will continue and we have confidence in our key large cap Chinese investments. Today I thought I’d write an overview of Tencent, our largest single Investment in China and a company well on its way to being one of the largest in the world.
Tencent: China’s Facebook
In 2016, the number of Chinese citizens who accessed the internet through a mobile device surged more than +12% to 695,000,000, roughly half the population. This is a stunning statistic in itself and clear evidence of “structural growth”.
China has become a major source of revenue for smartphone players from Qualcomm Inc. through to Apple Inc., which now counts the greater China region as its biggest international market.
Tencent’s messaging services were by far the most popular Chinese mobile apps in 2016, leading strong growth in the world’s largest internet and smartphone market.
Tencent’s “WeChat” remained the most heavily used app in the country in 2016 with almost 80% of the online population employing the social media service frequently, the China Internet Network Information Centre (CNNIC) said in its annual report released last week. Tencent’s “QQ” took second place in the annual survey.
The slide below (sourced from Mary Meeker’s excellent 2016 Internet Trends presentation) highlights just how dominant Tencent is in the mobile internet space in China. It shows that Chinese consumers spend approximately 58% of their time on their mobile looking at a Tencent owned virtual “real estate”. That is to say that Chinese consumers spend on average 2 hours per day (55% x 200 minutes) on their mobile engaged in a Tencent owned Apps/Websites.
This eyeball time is clearly a valuable proposition for online advertising, which is growing strongly in China as per the chart below.
This structural growth that Tencent applications are harvesting is driving strong earnings growth. We forecast Tencent earnings to grow by +32% this year, which may well prove conservative. The stock commands a forward P/E of 28x and therefore a PEG ratio of less than 1x that we believe makes it cheap on price to growth measures.
Tencent is a core holding for the AIM Global High Conviction Fund as we believe it fits all our top down meets bottom up investment criteria.
All in all we continue to invest with confidence and conviction in what will continue to be volatile markets.
We look forward to what comes next, but feel very confident holding China’s “Facebook” while having the Australian dollar hedged.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
