China stocks continue their upward trend in Februray

BY LILIAN CO

Monthly Fund Commentary
21 Mar 2017

BY LILIAN CO

China stocks continued their upward trend in February. The MSCI China index and CSI 300 index climbed 3.54% and 1.9% respectively. Buoyant sentiment ahead of the National People’s Congress meetings in March and the strong US stock market performance further fuelled the market rally.

Chinese banks and insurance stocks had a strong run during the month as the People’s Bank of China (PBOC) unexpectedly raised short term interest rates by 10 basis points. Other high beta stocks such as property and auto stocks also outperformed on stronger than expected year-to-date sales. Exporters remained under pressure on fears of a potential border tax imposed on Chinese imports by the US. Technology stocks remained the market favourite in response to the iphone 8 upgrade cycle.

Both CPI and PPI continued to trend up in January but are likely to moderate in the coming months. Food prices in particular, which rose ahead of Chinese New Year, should come back down. The recent short term interest rate hikes by the PBOC were more about reining in excess liquidity in the system rather than inflation. Given inflation appears to be peaking, the Investment Adviser does not see upward pressure on long term interest rates.

The Fund rose 1.2% in February, lagging the benchmark by 2.4% during the period. The Fund’s zero exposure to the Chinese financial sector, which constitutes 30% of the index and was a strong performer in the month, was the major culprit of the underperformance. The Fund has maintained a zero weighting in Chinese financials for a long time, and this will remain until the Investment Adviser is convinced of the asset quality on their books. The recent run of financial stocks has been supported by mainland funds which consider the HK stock market a safe haven given the valuation discount and Renminbi depreciation expectations. The Investment Adviser is reluctant to chase the tail of this rally as fund flows can reverse easily once expectations change. Conversely, the Fund took advantage of the share price weakness of exporters to top up the exposure as the market overreacted to the risk of a potential trade war between China and the US.

 

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The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 17/03/17 and are based on internal research and modelling.