Quarterly Fund Commentary
Ivy Pacific Opportunities Fund (prospectus)
June 30, 2010
Manager(s):
Frederick Jiang, CFA/CPA
Market Sector Update
Global equity markets saw a meaningful correction in the second quarter and the Asian stock market was no exception. On relative basis, however, it managed to nicely outperform other major market indexes in the United States, Europe and Japan. The correction was triggered by the deepening financial crisis in Greece and other countries in Southern Europe. Public debt-to-gross domestic product ratios in these countries have reached an alarming level. The market was concerned about potential losses in sovereign debt and austerity programs in Europe, which may lower the potential economic growth rate there.
In China, in an effort to control overheating in the real estate market, stringent measures were announced in April. These included raising minimum mortgage rates and down- payment ratios for some home purchases. Officials also are considering starting a trial property tax. This led to drastic reduction in property transaction volumes and falling property prices. Tightening of monetary policy continued in China. In June, China launched a round of minimum wage hikes following growing labor disputes and a string of worker suicides. Beijing implemented a 20 percent monthly minimum wage increase to U.S. $140.
Korea was more directly impacted by the European turmoil as corporate profit growth was offset by concerns that export demand will be hurt by Europe's sovereign debt crisis. Additionally, increased tension between North and South Korea dampened sentiments.
Despite inflationary concerns, the Indian stock market was a relative outperformer on sustained industrial growth, nonfarm loan growth and Foreign Institutional Investor (FII) inflows. Food inflation, which continues to be high, has just started to roll over due to the past year's higher base. The Indian central bank has prudently decided not to front load its rate hikes in the current context of global uncertainty emanating from Europe and is following a path of gradual tightening. In April, Indian central bank raised policy rates as well as reserve requirements by 25 basis points.
Portfolio Strategy
The Fund remains well-diversified across Asia, with the greatest exposures in China, India, South Korea, Taiwan and Singapore. We remain overweight China as we believe the market concern about a property bubble and economic hard landing in China is overblown. We believe that corporate earnings will continue to surprise on the upside. We selectively added some positions in India as we believe certain sectors are more attractively positioned. Towards end of the quarter, we added back positions in the Chinese banking sector as we found valuation quite attractive. We reduced our position on Chinese banks toward the end of last year based on our concern of potential capital raising activities in coming months and potential policy changes from the Chinese central bank. At current valuation, we believe risks have already been priced in.
Outlook
We will be watching for any signs of further monetary and fiscal tightening and withdrawal of stimulus in China. Other Asian central banks also may raise rates in coming months. The equity market may respond negatively to a new tightening cycle, but previous cycles showed that the equity market normally performs quite well during the cycle. Meanwhile, we will continue to closely watch commodity prices. With a better-than-expected recovery of the U.S. economy, there will be increased competition for commodities, which could further add to inflation risks across Asia.