Top Equity Funds 3Q24: Which China funds outperformed?

Market Recap 3Q24

Despite significant volatility largely driven by the massive unwinding of yen carry trades in August, global markets rebounded to reach record highs by the end of the third quarter. The global economy has shown resilience, and with inflation slowing, central banks have started cutting rates, helping to boost markets further.

China and Hong Kong emerged as some of the best performers. While Chinese equities were hovering near multi-year lows in early September, Beijing’s sweeping stimulus package on 24 September sparked a sharp market rebound. By the end of the quarter, China (as represented by MSCI China) and Hong Kong stocks (Hang Seng Index) saw impressive gains of 17.0% and 15.7% respectively in SGD terms.

Conversely, Taiwan and South Korea lagged global peers. Both markets were badly hit by the sell-off in technology stocks driven by growing doubts about AI optimism. South Korea, in particular, faced additional pressure due to concerns over the sustainability of the memory chip recovery. In September, rumours surfaced that Samsung Electronics – who has fallen behind SK Hynix in the memory chips used for AI – was planning its first-ever large-scale layoffs globally. The layoffs have since materialised in October, and Samsung also issued a lengthy apology after posting disappointing earnings.

Figure 1: Performances of major markets ranked

Top Performing Equity Funds of 3Q24

Three out of the top 10 best performing equity funds in 3Q24 are primarily invested in China A-shares: FTIF – Franklin Sealand China A-Shares A Acc SGD-H1, abrdn SICAV I - China A Share Sustainable Equity A Acc SGD-H, Blackrock Systematic China A-Share Opportunities A2 SGD-H. We note that they have overweight positions in Contemporary Amperex (CATL) (SZSE:300750) which rallied 40% in the quarter, outperforming the broader market CSI 300’s 16% gain (in local currency terms, unless otherwise stated).

Meanwhile, all other top-performing Chinese equity funds, such as Schroder ISF China Opportunities A Acc SGD-H and Manulife Global Fund - Dragon Growth AA MDISTG SGD-H have significant positions in tech giants Alibaba (HKEX:9988), Meituan (HKEX:3690), and Tencent (HKEX:700). These tech companies outpaced the broader market, recording gains between 19% and 56% in 3Q24.

Asian REITs outperformed in the quarter driven by the Fed’s 50 basis points rate cut in September and market expectations of more aggressive cuts, with the Manulife Global Fund - Asia Pacific REIT S (G) MDIST SGD-H leading the way. A key contributor to the fund’s performance was Link REIT (HKEX:823) which surged 29%. With around 15% exposure to Mainland Chinese properties, the REIT also benefitted from the renewed optimism surrounding China.

Another sector that has rallied on the back of rate cuts is gold, with prices surging to all-time highs. Lower interest rates tend to make gold, which doesn’t offer a yield, more appealing to investors. In addition, escalating geopolitical tensions in regions like the Middle East have driven investors to seek safer assets like gold. This has benefitted funds invested in gold-mining companies, including the Schroder ISF Global Gold A Acc SGD-H and Blackrock World Gold Fund A2 SGD-H.

Table 1: Top Performing Equity Funds of 3Q24

Fund Name	3Q24 (%)	YTD (%)	Segment
FTIF - Franklin Sealand China A-Shares A Acc SGD-H1	23.20	5.92	China-Local Equity
Schroder ISF China Opportunities A Acc SGD-H	23.10	15.64	China Equity
Manulife Global Fund - Dragon Growth AA MDISTG SGD-H	22.08	23.94	China Equity
abrdn SICAV I - China A Share Sustainable Equity A Acc SGD-H	21.94	10.99	China-Local Equity
Manulife Global Fund - Asia Pacific REIT S (G) MDIST SGD-H	21.15	1.98	Asia Pacific Exc. Japan Property Equity
Schroder ISF Global Gold A Acc SGD-H	20.20	33.05	Global Gold Equity
Blackrock Systematic China A-Share Opportunities A2 SGD-H	19.36	21.73	China-Local Equity
BNP Paribas China Equity Classic RH MD SGD	18.29	16.55	China Equity
Allianz All China Equity AT Acc H2-SGD	18.29	18.32	China Equity
Blackrock World Gold Fund A2 SGD-H	17.69	28.29	Global Gold Equity
Total returns basis in SGD terms Source: iFAST Compilations Data as of 30 September 2024

Bottom Performing Equity Funds of 3Q24

In a quarter where global equities rose to record highs, Turkey stands out for its poor performance. The HGIF - Turkey Equity Fund CL AD SGD posted substantial losses as high interest rates and inflation erode corporate earnings. As of September, Turkey’s benchmark interest rates stood at 50% while inflation rate was 49.38% – one of the highest in the world.

Dollar-hedged Japan equity funds like the Blackrock Japan Flexible Equity A2 USD-H and BNP Paribas Japan Equity Classic Cap H USD also delivered steep losses as the US dollar depreciated by 11% against the Japanese yen in 3Q24. Expectations of aggressive Fed easing, combined with the Bank of Japan's rate hike in July, drove the yen to its strongest levels since 2023 by mid-September.

Another notable underperformer in the quarter was the LionGlobal Korea Fund SGD. Roughly 30% of its assets are invested in Samsung Electronics (including preference shares) and SK Hynix, both of which dropped around 25% in 3Q24 due to the global tech sell-off and concerns about the sustainability of the memory chip recovery. Similarly, the Blackrock Next Generation Technology A2 USD, where SK Hynix is among the top 10 holdings, also suffered from the tech rout.

Table 2: Bottom Performing Equity Funds of 2Q24

Fund Name	3Q24 (%)	YTD (%)	Segment
HGIF - Turkey Equity Fund CL AD SGD	-16.09	23.26	Turkey Equity
Blackrock Japan Flexible Equity A2 USD-H	-12.56	16.51	Japan Equity
LionGlobal Korea Fund SGD	-10.85	-3.74	South Korea Equity
BNP Paribas Japan Equity Classic Cap H USD	-10.73	11.41	Japan Equity
Blackrock Next Generation Technology A2 USD	-9.99	7.96	Global Technology Equity
Blackrock World Energy Fund A2 USD	-9.94	-0.01	Global Energy Equity
Nikko AM Japan Value B USD-H	-9.83	15.03	Japan Equity
Nikko AM Japan Dividend Equity USD-H	-9.27	10.79	Japan Equity
GS Japan Equity Portfolio Acc Snap USD-H	-9.10	15.66	Japan Equity
Fidelity Absolute Return Global Equity A-ACC-USD	-9.05	1.97	Global Equity
Total returns basis in SGD terms Source: iFAST Compilations Data as of 30 September 2024

Final thoughts

While global equities are at record highs, some investors may be tempted to lock in gains or hesitate to stay invested. However, with strong fundamentals supporting most equity markets, we recommend focusing on the long-term potential. A disciplined, long-term investment strategy rooted in patience can yield substantial rewards.

US equities remain one of the most desirable to own because of their wide competitive moats, strong balance sheets, diversified revenue streams and favourable business environment.

We are also positive on the New Asian Tigers: Japan, South Korea, and Singapore.

Japan: Continues to benefit from structural reforms and the return to a normalised economy. Against the potential for a stronger yen, we expect quality companies with competitive advantages and domestic-oriented companies to outperform. We recommend maintaining exposure to the yen via an unhedged share class.

South Korea: While South Korea’s memory chip exports are experiencing slower price gains, we think it is not uncommon particularly after a period of rapid expansion. The country's leadership in technology and innovation, along with strong structural demand for semiconductors, will continue to drive its economy and stock market. The ramping up of government subsidies for chipmakers also supports competitiveness.

Singapore: Singapore's relatively high dividend yields make it a compelling destination for income-seeking investors, especially with interest rates expected to decline. For REITs, we recommend a selective, bottom-up approach, focusing on high-quality S-REITs with strong fundamentals.

Meanwhile, China can be viewed as a tactical position – a short-term bet rather than a core holding. Despite long-term structural challenges like its shift towards a state-controlled economy, the rally in September shows that investors can capitalise on valuation gaps.

Related article: These markets are at record highs. Here are the reasons why you should stay invested.

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.