K2 Asian Absolute Return (KAM0100AU) Report & Performance

The K2       Asian       Fund       returned       4.63%      for      the      month      to      outperform      the index.    The    strong    monthly    performance    of    the    fund   has   been   the   result   of the      underweight      to      China      and      overweight      to      SE      Asia,      the      Pacific     and other     global     regions.     Some     of     the     best     sector     and     stock     contributors     to the       monthly       performance       have       been       the       energy       sector       that      includes Beach    Energy    (BPT),    Karoon    Energy    (KAR)    and    Woodside   (WPL).   Other good      performing      sectors      included     financials,     Kina     Securities     (KSL)     and JP      Morgan      (JPM).     Also,     exposure     to     the     NZ     aged     care     and     residential sector, Winton Land (WTN) and Summerset Group (SNZ).

Increasingly     markets    globally    are    becoming    more    comfortable    with    a    soft economic       landing      scenario.      The      regular      economic      data      flow      from      key leading        developed        economies        reinforces        the        resilience        of       aggregate economic,        credit        conditions        and       earnings.       The       strong       labour       market conditions     in     the     US     have     been     supportive     despite    the    most    aggressive tightening    cycle    for    a    generation    from   the   Fed.   Further,   the   consumer   and business         sentiment         indicators         appear         to         be        holding        up        in        the        US compared        to        other        economies        such       as       the       EU       region,       the       UK       and Australia.    Key    global    central    banks,    particularly   the   Fed   are   well   placed   to engineer a soft landing which implies that rates will stay higher for longer.

China         continues         to         disappoint         with         ongoing        weaker        than        expected economic      data      as     conditions     for     households     and     corporations     in     China remain      challenging.      There     are     early     signs     of     some     consolidation     within the         China         property         sector         that         has         witnessed         a         sever         correction. Ultimately    the    central    bank    in    China,    the    PBoC    will    need   to   continue   their stimulus    program,    become    a    little    more   innovative   with   their   policy   and   try to     turn    around    investor    and    consumer    confidence    in    mainland    China.    On the     positive     side,     the     lower    inflation    data    coming    out    of    China    is    positive for     other    key    global    economies.    Within    the    broader    APAC    region,    Japan, India      and      the      South-east      Asia     region     (including     Australia)     will     continue attract      investors      as      China      works     through     their     much     needed     economic stimulus and reforms.

We          continue          to         maintain         underweight         exposure         to         China         and         an overweight      to      South-East      Asia      and     Australia.     A     focus     on     earnings     that export    to    China    continues    to    be    our   preferred   investment   strategy   as   they look      at      additional     stimulus     going     forward.     The     portfolio     cash     position     is marginally lower at 5.1%.

The K2 Asian Fund returned -0.68% for the month to be -0.62% year-to-date (YTD).

The stalled economic recovery within China continues to weigh on market sentiment for the worlds second largest economy. While key developed economies, led by the US, continue to exhibit resilience in economic momentum and aggregate corporate earnings, many challenges persist for the China as they try to stimulate their economy.

The central bank in China, the PBoC has continued to do a significant amount of the stimulus to date and has been proactively lowering interest rates to help drive a more sustainable recovery. However, both household and business sentiment in China continue to remain weak. This is partly due to the aggressive corporate clampdowns in the March quarter of 2021, combined with the relatively high youth unemployment rate and their notably large property sector challenges.

Beijing is looking to become more innovative and recalibrate and adjust their policy mix to stimulate economic activity. Some longer-term reforms on first glance look pragmatic. This includes China rolling out several economic reforms to address structural issues, including reducing reliance on exports, promoting domestic consumption, and improving their business environment.

However, in the shorter term it has proved difficult to attract global investors for long duration investments. This is clearly a critical area they need to address and the recent open dialogue with US officials is an early and welcomed sign of some commitment to resolve many different trades issues.

Within the broader APAC region, Japan, India and the South-east Asia region (including Australia) will continue attract investors as China works through their reforms.

We continue to maintain underweight exposure to China and an overweight to South-East Asia and Australia. A focus on earnings that export to China continues to be our preferred investment strategy as they clows look at additional stimulus going forward. The portfolio cash position is marginally higher at 7.8%.

The      K2      Asian      Fund      returned      -1.34%      for      the      month      to      be     flat     (+0.1%) year-to-date (YTD) in a volatile market. The     investment     outlook     with     the     APAC    region    continues    to    exhibit    some unevenness     across     economic    momentum    and    the    earnings    outlook.  

 The largest    surprise    has    been    the    slowdown    within    China,    the    second    largest economy,      so      soon     after     a     very     robust     reopening.     The     slowdown     in     the various     partial     economic     indicators     for     China     has     been    a    surprise    given the      previous      strong      tailwind      associated     with     their     reopening     trade     from last year. Within    the    South-East    APAC    region,    it    is    a    little    different    as   there   is   some resilience            to            economic            momentum           despite           the           tighter           monetary conditions.    There    is    a    clear    global    slowdown    underway    which    is   the   clear result     of     restrictive     monetary     conditions     within     many     economies    as    they address the stubborn, but falling, inflationary conditions.

Despite     the     slowing     momentum,     corporate     earnings    have    not    slowed    as much     as     anticipated     and     have     surprised     expectations.    This    resilience    in corporate    margins    (aggregate)    imply    that    the    slowdown    ahead    will   not   be as      bad      as      previously      thought.      Markets      are      simply     looking     through     this slowdown,    or    shallow    recession   in   some   regions,   and   pricing   the   recovery in 2024 and beyond.

The     key     challenge     within    our    region    will    be    the    outlook    for    China.    Unlike other      key      economies      they      have      been      cutting      rates     and     do     not     have     a severe      inflation      problem.      Despite      the      PBoC      cutting      rates      for     well     over 18-months,      the      slowdown      in     activity     is     concerning.     Once     Beijing     adjust their       policy       mix       and       get      through      their      property      market      correction      and address       the      very      soft      business      and      consumer      sentiment,      they      will      be better placed to drive more sustainable but lower economic growth rate.

The     largest     beneficiary     of     the     slowdown     in     China     economic     momentum following    their    extended    lockdown    policy    is    the   re   allocation   of   investment towards the South-east Asia region (including Australia) and Japan. We          continue          to         maintain         underweight         exposure         to         China         and         an overweight      to      South-East      Asia,      Australia      and     NZ.     A     focus     on     earnings that      export     to     China     continues     to     be     our     preferred     investment     strategy. The portfolio cash position is 4%.

The        K2        Asian        Fund        returned        +0.26%        for        the       month       to       be       +1.43% year-to-date.        Market        conditions        within        the        APAC        region        continue       to remain      mixed      which     has     been     reflected     in     the     uneven     nature     of     partial economic       indicators       and       the       differences       in       the       policy       response.       The global     backdrop    year-to-date    can    be    summed    up    as    resilient    vs    previous expectations         for         a         deep         economic         recession.       

While        conditions        are slowing,       aggregate       corporate       earnings       have       not       slowed       as       much      as anticipated.    Companies    are    trying    to   protect   their   margins   and   prepare   for the       upcoming       economic       recession.       To       date      the      slow      down      is      not      as severe as expectations six months ago. Consensus       expectations       for       the       downside       to      earnings      for      2023      have improved      but      will     still     be     negative     (circa     minus     8-10%     range)     for     2023. This    is    off    a    higher    corporate    earnings    base    in    2022    and    also   reflects   the ability        for        the        corporate        sector        to       pass       on       higher       prices       to       date       to consumers.       The       tight       labour       market       has       helped.      There      are      plenty      of challenges      ahead,      particularly      the     stubborn     services     inflation     which     will imply        monetary        policy       will       remain       restrictive.       Higher       rates       for       longer combined        with        ongoing        quantitative        tightening        will       lead       to       additional contraction      ahead,      particularly      the     price     credit     market.     Looking     through the        second        half        2023        contraction,        markets        are        pricing        in        the       2024 recovery    profile.   

The    challenges    will    continue    to   be   the   policy   response   to address inflation. The    second    largest    economy,    China   has   a   different   set   of   challenges.   The PBoC      has      been      cutting      rates     for     well     over     18-months     and     they     do     not have    the    same    inflation    concerns    as    many    other    key    developed   markets. However,     they     are     dealing     with    a    notable    slowdown    in    economic    activity compared    to    expectations    and    the    consequences    of    their    property    sector correction.      Never-the-less,      the      ongoing      opening      of      their      economy      will continue      to      assist     cushion     the     downside     risks     to     global     growth     as     their economy    increasingly    relies    on    domestic    demand    as   a   larger   contribution to    growth.   

The    largest    beneficiary    of    the    extended    China    lockdown   policy in    recent    years    is    the    re    direction    of   global   investment   into   the   South-east Asia region and also the Japanese equity market. We          continue          to         maintain         underweight         exposure         to         China         and         an overweight      to      South-East      Asia,      Australia      and     NZ.     A     focus     on     earnings that        export        to       China       has       been       our       preferred       strategy       for       the       China reopening trade. The portfolio cash position is just above 5%.

The       K2      Asian      Fund      returned      -1.48%      for      the      month      outperforming      the index      by      +0.53%.     Following     recent     strong     performance,     global     markets consolidated     as     investors     continue     to     digest    the    weekly    global    data    flow for      signs      of      improved      inflation     signals     to     better     understand     the     interest rate outlook. Economies     in     the     west     continue    to    navigate    the    stubbornly    high    inflation outlook.       

Good        signs        continue        via        various        data        points       that       reinforce “goods”        inflation        continues        to        fall.        However,        the        services       portion       of inflation    remains    too    high    for    central    bank    policy    makers.   The   tight   labour market    has    effectively    supported    the   services   side   of   the   economy   and   as a     consequence,     wage     indicators    have    remained    elevated    and    a    concern for policy makers. Given    the    higher    for    longer    inflation    outlook,    central    bankers    -    led    by   The Fed        -        will        continue        to        remain        hawkish        with        their        commentary.       The alternative     of     tolerating     higher     inflation     is     very     sub    optimal    for    investors, the       corporate      sector      and      households.      A      delayed      response      to      inflation implies           a          much          higher          unemployment          rate,          contracting          economic conditions and negative earnings and credit conditions. Economic     conditions     within     China    are    on    a    different    trajectory    compared to     other     key     economies.     While     the    China    re    opening    narrative    has    been mixed,        the       economic       momentum       continues       to       improve       in       aggregate. China       domestic      demand      will      continue      to      be      a      larger      portion      of      China GDP.

     Further,      the      inflation      rate      in      China     is     notably     lower     compared     to most      of      the      world      allowing      their      central      bank      -      The     PBoC     -     to     remain supportive     and     stimulatory.     Concerns    in    China    remain    with    regard    to    the property       correction       and       finding      a      reasonable      resolution.      This      includes some     government     and     PBoC     support     for    funding.    The    aim    is    to    improve bad    and    doubtful    debt    provisions    and    attract    additional    funding    to    try   and improve    investor    sentiment.    While    Beijing    has    worked    to    improve   internal capital     flow,     the     key     concern     is     the     ability     for     China     to    attract    long    term global      capital.      While     some     short     term     investments     are     occurring,     many global       pension       funds       continue       to       lower      their      duration      investments      on mainland     China.     This    has    further    supported    the    South-East    Asian    region as a notably alternative for investors. We          continue          to         maintain         underweight         exposure         to         China         and         an overweight to South-East Asia, Australia and NZ.

The       K2       Asian       Fund       returned       5.96%      for      the      month      outperforming      the index by +2.15% in January. The      equity      market      rally      reflects     markets     are     more     comfortable     that     the downside    risks    in    2023    will    not    be    as    bad    as    previously    thought.    The   key economic         data         updates         in        recent        months        have        continued        to        show evidence    of    improving    economic    conditions    versus    previous   expectations of    a    hard    recession.   

The    improvement    in    expectation    is    reinforced    by   the resilience     of     key     developed     market     economies     despite     the     tightening     in monetary policy. Hence the market volatility has subsequently fallen. In       particular,       the       resilient       labour      market      conditions      and      the      continued lower       inflation       inputs       from      recent      highs      have      been      key      drivers      in      the recent       rally.       The      higher      cash      rates      are      creating      the      required      demand destruction    and    economic    pain    that   the   central   banks   have   been   targeting which     has     led     to     the     lower    inflation    prints.    Although    it    is    notable    that    the services inflation is stubbornly high the goods inflation is falling.

The     repricing     of     the     downside     risks     has     also     been     evident     in     the    better earnings    outlook    in    the    US    (aggregate)    downside.    Credit    conditions   have also     remained     in     good     condition     despite    the    slowdown    and    impairments remain     at     near     cycle     lows.     While     there     is     more     tightening    to    come    from global       central       banks       they       are       slowing       the       pace       of       rate      hikes      as      we approach    peak    cash    rate    cycle.    In    anticipation,    long    bond    yields   continue to fall maintaining the yield inversion.

The    continued    fast    track    opening   of   the   China   economy   following   years   of persistent      lockdowns      will      be      a      net      positive     for     global     growth     this     year. There     is     targeted     stimulatory     policy     and    the    internal    economic    activity    in itself         will        be        a        key        economic        driver        for        the        worlds        second        largest economy.     The     recovery     of     the     China     economy     will     also     benefit     key     EU based        economies        companies        that        are        correlated.       Also,       the       targeted support     for     their     housing     sector     from     funding    rates    to    developer    support has     gone     a     long    way    to    assist    in    improvement    of    sentiment.    Importantly, South-East     Asian     economies     and     companies     are     beneficiaries     of    global trade. We          continue          to         maintain         underweight         exposure         to         China         and         an overweight       to       South-East       Asia,       Australia       and       NZ.       The       portfolio      cash position is around 10%.