A meaningful market correction finally materialized in September

By Lilian Co

Monthly Fund Commentary
3 Oct 2014

By Lilian Co

With the MSCI China Index tumbling 6.6% after it had recovered 22.5% from the lows seen in March. Softening macro data and weak property sales in China has yet again raised concerns regarding the strength of economic recovery. The “Occupy HK” protest ahead of October Golden Week cast further uncertainty on the market. 

Most sectors recorded losses with the exception of Healthcare which was up 6% month on month. Healthcare companies were among the few that demonstrated resilient growth in the interim result season. Energy was the worst performer, down 11%, due to crude price weakness.

The economic recovery showed signs of fatigue as per softening August macro numbers. Major macro indicators, e.g. PMI, retail sales, electricity consumption, fixed asset investment and export showed growth deceleration. The only bright spot was new loan creation and total social financing which recovered significantly from July’s levels.

Confronted by declining property prices, the government restarted monetary easing by injecting Rmb500bn liquidity into five big banks for three months and cutting 14-day repo rate by 20 basis points. The former move was equivalent to an effective 0.5% reserve requirement ratio cut, while the latter was an indirect interest rate cut. PBOC and CBRC also jointly announced a relaxation in mortgage lending rules to support the property market. The Investment Adviser therefore expects growth reacceleration to resume in the fourth quarter following this latest round of stimulus.
 
At the corporate level, Sinopec announced details of asset restructuring together with the sale of a 30% stake in the marketing division to twenty-five strategic investors (most of whom are financial investors). However, the announcement was taken negatively by the market, as commentators saw little in the way of real restructuring, with the stock tumbling 13.5% during the month. There was also heavy selling in internet stocks as they were clearly the funding source ahead of the Alibaba listing. Alibaba was up 38% on debut, putting the stock at over 30X 2016 P/E, and no longer a bargain. HK centric companies, e.g. developers/landlords, gaming and retail stocks were sold down aggressively; fortunately, the Fund had only very limited exposure to these stocks.
 
The Fund was down 4.1% in September – this represented an outperformance of the MSCI China index of 2.5%. The source of this strong result was primarily due to the non-benchmark focus and also the higher cash levels raised earlier in the year. The Investment Adviser believes that the “Occupy HK” protest will remain a HK event and will hence have a limited negative impact on China as a whole. Given the latest round of fiscal stimulus announced by the Chinese government, it is anticipated that sentiment will recover over time. Further, the Investment Adviser views the recent market correction as a good opportunity to bargain hunt for quality names.
 
 
Commentary provided by LBN Advisers in their capacity as Investment Adviser to the Fund as of 09 October 2014