BY LILIAN CO
In March, market sentiment was dominated by trade disputes, with daily stock market movements dictated by Donald Trump’s tweets. The month started with the US imposing import tariffs on steel and aluminum globally, however later in the month it transpired that these measures targeted import tariffs on Chinese goods.
Against the backdrop of uncertainty, the MSCI China Index and the CSI 300 Index declined by 3.29% and 3.11% respectively. Further, the sell-off of technology stocks in the US (triggered by investigations into Facebook) and Tencent’s share placement by its major shareholder weighed on market sentiment. Sector wise, insurance, internet and auto were among the worst performers, while Chinese properties and pharmaceuticals outperformed.
The earnings season failed to provide a positive catalyst for the market, despite companies generally reporting good results with positive guidance. Investors instead took profit on good results amidst fears surrounding a potential trade war. In terms of corporate results, Chinese property, HK retailers, Macau gaming and pharmaceutical stocks stood out. On the other side of the spectrum, exporters’ margins were negatively impacted by the appreciation of the Renminbi and rising raw material costs.
The National People’s Congress (NPC) meeting was convened during the month, with the highlight being the constitutional change in order to remove the presidential term limit, allowing President Xi to further consolidate his political power. The legislation on property tax was mentioned again without any timetable; regardless this resulted in a relief rally of property stocks. In terms of reform initiatives, the China Banking Regulatory Commission (CBRC) allowed banks to lower their bad loan coverage ratio from 150% to 120-150%, which is clearly perceived positively by banks. At the same time, the China Securities Regulatory Commission (CSRC) has been looking to allow secondary listings of foreign companies in the form of Chinese Depository Receipts (CDR) in China.
During the month, the Fund lost 3%, outperforming its benchmark by 0.29 percentage points. The portfolio’s overweight in Chinese properties (which bucked the down market trend) and large underweight in Tencent paid off, while the portfolio’s overweight in the auto sector, which suffered a big sell-off during the month, diminished the Fund’s outperformance.
Despite the escalating trade spat between China and the US, a full blown trade war is unlikely in the Investment Adviser’s opinion as both countries cannot bear the associated consequences. The team thinks that the US trade war threat is simply a means to accelerate China’s opening up of the market and that a deal between the two countries will eventually be reached.
The views and statements contained herein are those of LBN Advisers Limited in their capacity as
Investment Adviser to the Fund as of 16/04/18 and are based on internal research and modelling.