FUND COMMENTARY EASTSPRING INVESTMENTS UNIT TRUSTS DRAGON PEACOCK FUND

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1 INVESTMENT OBJECTIVE The investment objective of the Dragon Peacock Fund is to maximise long-term total return by investing primarily in equity and equity-related instruments of corporations, which are incorporated in, or listed in, or operating principally from, or carrying on significant business in, or derive substantial revenue from, or whose subsidiaries, related or associated corporations derive substantial revenue from, the People s Republic of China (PRC) and the Republic of India (India). FUND DETAILS Benchmark 50% MSCI China Index, 50% MSCI India Index Portfolio Managers Nicholas Koh, Krishna Kumar MARKET REVIEW China and India s stock markets advanced for a second consecutive month in November to emerge as the top two best-performing equity markets in the Asia Pacific ex-japan region for the month. An unexpected policy-rate cut by China s central bank, the first in more than two years, lifted Chinese shares while a sharp decline in international crude oil pries and expectations of reforms propped up Indian shares. The MSCI India advanced 3.02% in SGD terms in November, making India the best-performing equity market during the month and year-todate in the Asia Pacific ex-japan region. The MSCI China Index rose 2.99% in SGD terms in the same month, making China s stock market the second-best performer in the region, next to India s. Indian financials led returns in November followed by Chinese financials and industrials. China s energy sector lagged the most followed by Indian utilities and China s health care sector. 1 In a surprise move, the People s Bank of China (PBoC) announced asymmetrical rate cuts which saw the one-year benchmark lending rate lowered by 40 basis points to 5.6%, the first rate reduction since July The one-year deposit rate was trimmed by 25 basis points to 2.75%. Shares also rose on the confirmation of the Nov. 17 start date of the trading link dubbed as the Shanghai-Hong Kong Stock Connect although gains were capped by the initial lukewarm trade. 2 The sharp decline in crude oil prices, favorable macro data as well as expectations of further reforms, possibly to be pushed at the winter session of Parliament, also contributed to the Indian shares gains. The market seems to be of the view that a cyclical upturn is underway, reforms momentum is strong and that the twin deficits look under control following measures by Prime Minister Narendra Modi s government. 3 Expectations that the country s central bank will lower policy rates in early December also lent support to India s stock market. But the Reserve Bank of India kept key rates unchanged for at its Dec. 2 meeting but indicated that some monetary easing is likely early next year. 4 FUND PERFORMANCE The Fund posted a 4.09% net-of-fees return in SGD terms in November, outperforming the benchmark s 3.03% return by 107 basis points. Stock selection in Indian health care as well as Chinese materials buoyed the portfolio s relative performance the most during the month. Stock picks in Indian industrials and energy hurt the portfolio s relative performance the most. All data as of 30 unless otherwise stated. Sources: 1 MSCI China and MSCI India indices, Sector Performance as at 30, Eastspring Investments 2, J.P. Morgan China Monthly Wrap, 2 December 2014; Various Bloomberg News articles, 3 J.P. Morgan India Monthly Wrap, 1 December 2014; Various Bloomberg News articles, Page 1 * Please refer to the attached factsheet for Fund performance details.

2 Franshion Properties, Huabao International Holdings and China Pacific Insurance (CPIC) were the key contributors to the portfolio s relative performance in November. The Fund has an overweight position in Franshion and CPIC while it has a non-benchmark position in Huabao. KEY CONTRIBUTORS Franshion outperformed the benchmark in November following recent share-price declines and expectations of sales recovery due to liquidity loosening, new launches that were brought forward to this year and enbloc sales. Compared to the peer average, Franshion also has more exposure to T1 cities which have healthier property markets with sustainable housing demand and strong purchasing power. The Fund manager deems Franshion shares as mispriced and likes the firm s strong brand name, track record and steady rental income. Huabao shares surged 24% in November on the back of a better-thanexpected 1HFY15 results, a strong special dividend equal to a 100% payout ratio and the potential for more special dividends. CPIC shares outperformed following strong life insurance agency new business sales in the third quarter. The portfolio manager likes CPIC s market-leading capital position, higher net investment yield versus peers and solid investment strategy in asset management. Year-to-date, LIC Housing, Tata Motors and Axis Bank emerged as the biggest contributors to the portfolio s relative performance. The portfolio has an overweight position in LIC Housing and Tata Motor shares. It owns A-DVRs which is not part of the benchmark. While the portfolio owns Axis Bank, the lender is a non-benchmark stock. LIC Housing led the major contributors to the portfolio s relative performance for the first 10 months of the year. The mortgage lender is liked for its strong earnings growth, low asset quality risks and attractive valuations. Tata Motors outperformed, helped by positive expectations concerning subsidiary Jaguar Land Rover s (JLR) margins outlook. The Fund manager believes that the levers for the automaker s future margin expansion, including the introduction of new models, remain intact. Axis Bank, the third largest bank in India, is well positioned to benefit from a pick-up in the economy given its strong liquidity and capital position. KEY DETRACTORS China Life Insurance, State Bank of India (SBI) and Sesa Sterlite were the key detractors from the portfolio s relative performance in November. The portfolio has no exposure to China Life and SBI. It has an overweight position in Sesa Sterlite. China Life Insurance outperformed the benchmark as the latest interest rate cut is expected to have a positive impact on insurance companies new business value (NBV) growth momentum. The portfolio manager, however, prefers CPIC among China s life insurers. He likes its solid value of new business, strong balance sheet and consistent execution. SBI shares rose on improved sentiment towards financials as well as the lender s 2QFY15 profit which exceeded expectations. Our portfolio manager, however, believes that SBI s valuation is less attractive than those of its peers. All data as of 30 unless otherwise stated. Metals and oil producer Sesa Sterlite lagged after hefty gains in the first half and the sharp drop in oil prices. The company has delivered decent 2Q results despite a tough environment. The portfolio manager remains positive on the stock given the upside potential from a possible Hindustan Zinc stake buyout and regulatory relief for Sesa s new capacites. Page 2

3 Wumart Stores Inc, Housing Development Finance Corp (HDFC) and Franshion Properties emerged as the top detractors from the portfolio s relative performance for the first 11 months of the year. The portfolio has a non-benchmark position in Wumart, an underweight in HDFC and an overweight in Franshion. KEY DETRACTORS Wumart has underperformed as its first-half results disappointed, worsened by concerns about the impact of aggressive price cuts in stores on earnings. The Fund manager believes the stock is undervalued versus peers and that in the medium to long term the retailer will benefit from newer stores, better sourcing and logistics efficiency. Franshion is attractive in terms of valuation, heightened by its strong brand name and track record, steady rental income and reputation for product quality. We prefer LIC Housing over HDFC on valuation grounds. FUND ACTIVITY The portfolio established a new position in Daqin Railway (A-share) via the SH- HK Stock Connect Program. It also added Bharti Airtel and Bharat Petroleum in November. Daqin owns the world s largest freight railways and has cornered 35% share of the China railway coal transportation market. Daqin s valuation looks attractive, trading near historical trough levels, and its dividend payment is supported by very strong free cash flow. It is a major beneficiary of China s railway reform, which will likely be on pricing and efficiency improvement. Bharti Airtel is the leading telecom operator in India which has been increasing its market share in the last two years with the surge in demand for data services in the south Asian nation. Bharti has 212 million mobile subscribers in India; of which 40 million subscribe to data. Receding competition and Bharti s focus on free cash flow generation and balance sheet improvements could lead to a rerating. Bharat Petroleum Corp Ltd (BPCL) is a refining and marketing company in India which is likely to benefit from the ongoing oil reforms. It has a good track record compared to other oil marketing companies (OMCs) in India and has attained considerable success in exploration and production outside India. While OMCs in India will benefit from lower fuel ;osses, compared to peers, Bharat has put in place measures to upgrade its refinery to higher complexity and has relatively lower debt compared to rivals. The portfolio exited Oil India during the month following year-to-date gains as other public sector unit (PSU) companies. The portfolio manager also trimmed holdings in China Mobile, LIC Housing Finance and China Shanshui Cement Group. Proceeds of the China Mobile sale as well as of China Shanshui were used to fund Daqin Railway stake purchase. All data as of 30 unless otherwise stated. Page 3

4 STRATEGY AND OUTLOOK Our portfolio managers remain positive about the long-term outlook for China and India. China s stock market valuations are attractively below its historical average and India s valuations are fair but may not be reflecting entirely the benefits of reforms that are underway. China s efforts to implement promised reforms will continue to drive the equity market. In the near term, market attention is on the possibility of more easing measures by policymakers as well as the impact of the Shanghai-Hong Kong Stock Connect. Investors will continue to be focusing on the delicate balancing act that China is undertaking in putting reforms in place while trying to rein in credit expansion and sustain economic growth. Mild easing is likely to continue in China as policymakers aim to mitigate property and debt risks. The portfolio manager is slightly optimistic about the current pace of state-owned enterprises (SOE) reforms, but consistency in their implementation will be supportive of the market. Strong domestic consumption and demographic advantage buttress our positive view on India s outlook. Under Prime Minister Narendra Modi s leadership, the new government s strong mandate is widely expected to push for reforms that will yield structural benefits. We continue to monitor the new government s policy actions. Government s key agenda which seek to address issues such as inflation, infrastructure and policy reforms, are likely to yield structural benefits. Longer term, the market is expected to be driven by corporate earnings growth. The Fund manager maintains exposure to companies with strong cash flows, which are levered to perform better during a phase of growth recovery. All data as of 30 unless otherwise stated. Page 4

5 Disclaimer Investors should note that the net asset value of this Fund is likely to have a higher volatility due to its concentration of investment in two countries. Please note that the Luxembourg-domiciled Eastspring Investments has established a similar sub-fund within the umbrella fund of Eastspring Investments having the same investment objective and focus as the Fund (the "Eastspring Investments sub-fund"). In the event that the Eastspring Investments sub-fund be approved by the Authority as a recognised scheme available for direct investment by the retail public in Singapore, Eastspring Investments (Singapore) Limited may, in consultation with the Trustee, and subject to the approval of the relevant authorities, (i) seek to terminate the Fund and exchange existing Units in the Fund for shares in the Eastspring Investments sub-fund; or (ii) change the investment policy of the Fund from a direct investment portfolio to a feeder fund investing all or substantially all of its assets into the Eastspring Investments sub-fund. Investors should note that in the event of an exchange Units for shares in the Eastspring Investments sub-fund, there is no assurance that the fees and charges of the Eastspring Investments sub-fund would not be higher than that of the Fund. Investors should not invest in the Fund in anticipation of investing in the Eastspring Investments sub-fund as there is no certainty whether the Eastspring Investments sub-fund may be recognized for offer to the retail public in Singapore. This document is solely for information and may not be published, circulated, reproduced or distributed in whole or part to any other person without the prior written consent of Eastspring Investments (Singapore) Limited ( Eastspring Singapore ) (UEN: H). This document is not an offer, solicitation of an offer, or a recommendation to transact in the investment units in the fund(s). The information contained herein does not have any regards to the specific investment objectives, financial situation or particular needs of any person. A prospectus in relation to the fund(s) is available and a copy of the prospectus may be obtained from Eastspring Singapore and its distribution partners. Investors should read the prospectus and seek professional advice before making any investment decision. The value of units in the fund(s) and the income accruing to the units, if any, may fall or rise. Past performance of the fund(s)/manager is not necessarily indicative of the future performance. Any prediction, projection or forecast on the economy, securities markets or the economic trends of the markets targeted by the fund(s) is not necessarily indicative of the future performance of the fund(s). An investment in the fund(s) is subject to investment risks, including the possible loss of the principal amount invested. Whilst Eastspring Singapore has taken all reasonable care to ensure that the information contained in this document is not untrue or misleading at the time of publication, Eastspring Singapore cannot guarantee its accuracy or completeness. Any opinion or estimate contained in this document is subject to change without notice. The fund(s)/ underlying fund(s) may use derivative instruments for efficient portfolio management and hedging purposes. Eastspring Singapore is an ultimately wholly-owned subsidiary of Prudential plc of the United Kingdom. Eastspring Singapore and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America. Eastspring Investments (Singapore) Limited (UEN H) 10 Marina Boulevard #32-01 Marina Bay Financial Centre Tower 2 Singapore Tel: Fax: eastspring.com.sg All data as of 30 unless otherwise stated. Page 5