BY LILIAN CO
In May, the performance of A shares and HK listed Chinese stocks diverged, with the MSCI China down 3.9% and major A share indices up 1.9 to 23%, (CSI 300 Index up 1.9%, Shanghai Composite Index up 3.8%, Chinext Index up 20% and Shenzhen A share Index up 23%).
A tightening of margin financing requirements by major brokers, (accelerated IPO approval by the regulator) and a sell down of A share bank stocks by Central Huijin (a government investment vehicle) all failed to cool the sizzling hot A share market sentiment. On the contrary, the HK market corrected with sentiment further suppressed by frequent placement activities, given that the HK market is dominated by institutional investors who have a tendency to be more fundamentally-driven, rather than retail driven A share investors. Many A-H discount plays that soared in April returned substantial gains as investors refocused on fundamentals, whilst expectation of a near term announcement of the Shenzhen HK stock connect program continued to attract fund flows into small cap stocks in HK.
The real economy has yet to respond to policy easing. Nevertheless, the market is witnessing green shoots emerging in the property sector. Nationwide property sales value was up 13% and 24% in April and May respectively with slight ASP improvement on a month on month basis. The Investment Adviser believes this to be an encouraging sign, as real estate investment accounts for 20-25% of fixed asset investment growth in China. The positive wealth effect created by a buoyant stock market is finding its way to the property market despite the sector underperforming the market due to a placement overhang in May. Stocks such as China Resources Land, Evergrande and CIFI Holdings took advantage of the share price rally to place new shares to reduce gearing. The Investment Adviser believes this is only a short term negative, and will continue to remain overweight in the property sector since the underlying trend is indeed improving.
The PBOC cut its one year lending rate by 0.25% again in May to 5.1%. The Investment Adviser expects that policy easing will continue until there is evidence of an economic recovery offering support to the equity markets. The announcement by the FTSE to launch two new transitional emerging market (EM) indices that include A shares, was a surprise to the market. The weighting of A shares will be set at 5% initially and thereafter gradually increased to 32%. This is not expected to have any immediate impact on fund flows, as funds tracking existing FTSE EM indices are not bound to switch into the new indices. Nevertheless, the Investment Adviser views this as a long term positive to the A share market and believes that it is just a matter of time before A shares are officially included in the existing EM indices.
The Fund returned -2.2% during May; outperforming the underlying benchmark by 1.7% after a strong April. Property and auto sectors contributed the most to the loss detracting 1% and 0.8% from the Fund respectively. The Shipping sector however, whilst the largest contributor to the Fund’s return in April, was down 0.38% in May. The Investment Adviser took profit early in the month believing the recent market correction to be a healthy consolidation, after the strong April gains.
The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 15/06/15 and are based on internal research and modelling.