Performance, Commentary & Portfolio

Fund Manager’s Review

Dear Fellow Shareholder,

The Net Asset Value (NAV) total return for September was -1.20%, versus -0.54% from the benchmark index.

Moribund Chinese markets roared back to life in September as the Politburo announced a series of stimulative measures to rejuvenate the sluggish economy.

China’s core problem is debt, property and the reliance of local government spending upon both. Property investment as a percentage of GDP far exceeds that seen in Ireland, for example, prior to the financial crisis. 90% of Chinese households own property, far higher than in the West, and many own multiple apartment units believing them to be an investment. Oversupply has undermined that belief and now property prices and transactions are collapsing, particularly outside the wealthiest cities, leading to a sharp fall in consumer confidence. Local governments have relied upon land sales to property developers to fund infrastructure projects and finance debts. With that source of funding now in abrupt decline, the economy has found itself in peril.

History shows us that property bubbles are rarely, if ever, deflated without economic pain. We are sceptical that the Chinese Communist Party (CCP) will be able to successfully steer a deeply imbalanced economy back to a steadier course. So far they have embarked upon a series of monetary measures – cuts to bank reserve requirements, interest rates - and acts to encourage equity ownership. Fiscal measures, including de facto helicopter money aimed at the consumer, are rumoured. In response to the stimulus measures announced, local stock markets rocketed, enriching a wealthy few. We are not sure this is what the CCP, with its goal of ‘common prosperity’ had in mind; the CCP relies upon broader economic success for its legitimacy

One feature of the Chinese economy is the closed capital account which traps money domestically. Savers therefore have limited choices. They can place money in the bank at unsatisfactory rates of interest or invest in property or the stock market. Fixed asset ‘investment’, a key driver of Chinese economic growth, has resulted in widespread oversupply and overcapacity in almost all industries, including real estate. This is not supportive of property price or stock market stability. 

Any global equity portfolio will have businesses with exposure to China. Within Brunner we have small holdings in mining giant Rio Tinto (China consumes half the world’s metals), LVMH (Louis Vuitton Moet Hennessey - Chinese consumers account for about a third of luxury goods sales) and AIA, the Hong Kong based life and health insurer. All three rallied hard in the month. Each is a terrific business with a valuation that somewhat reflects concerns about China, but we do worry that a true bursting of the Chinese property bubble would be painful in each instance – hence our cautious position sizing. 

We also had a cluster of good performance in our travel related holdings with General Electric (GE), AENA and Intercontinental Hotels Group (IHG) each contributing. GE makes and maintains the jet engines found ‘under wing’ in three of every four flights that take off worldwide. AENA owns almost every airport in Spain. IHG is a leading franchise business, lending brands such as Holiday Inn, Crowne Plaza and Six Senses to hotel owners. There is structural growth in the travel industry. Combined with some of the best business models and industry structures we have encountered, we are pleased to back this trend. However, we always consider which risks within the portfolio are correlated; we never want to put all our eggs in one basket.

There were no trades during the month.

Yours sincerely

Julian Bishop & Christian Schneider
17 October 2024

This is no recommendation or solicitation to buy or sell any particular security. Any security mentioned above will not necessarily be comprised in the portfolio by the time this document is disclosed or at any other subsequent date.

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