BY LILIAN CO
Chinese equities slid further in February after a dismal January. The MSCI China total return index and the CSI300 were down another 2.5% and 2.3% respectively. Free falling oil prices, fears of further Renminbi weakness and poor Chinese macro data persisted. Unsurprisingly, defensive stocks such as yield plays and utilities rose in the falling market. Energy stocks ended up outperforming the market with an absolute gain for the month as oil prices recovered after having hit below US$30/bbl intra-month.
Thanks to vigorous government intervention, the Renminbi stabilized after three consecutive months of devaluation. Given tightened control, capital outflows in February slowed to US$31bn. This compares to almost US$100bn of outflows per month in recent months. In the face of a further economic slowdown, the government has once again reverted to investment (through accelerating infrastructure investment and more property stimulus) as a means to stabilize growth. This was evidenced by the strong money supply growth and new loans made by banks in January. The Investment Adviser thinks this will only give a temporary boost to the economy unless the government launches a large stimulus program. The Investment Adviser believes the latter is unlikely though, given the high leverage already in the system.
The Fund was down 3.5% in February, underperforming the benchmark by 1.0%. A few of the Fund’s top holdings came under strong selling pressure during the month. Sihuan Pharmaceutical alone contributed -1.4% to the Fund’s return as the stock was sold down heavily on the resumption of trading. The Fund’s big non-index bets like Nexteer, AIA and Far East Consortium also detracted 0.5%, 0.35% and 0.33% respectively. The Investment Adviser expects share prices of the above names to rebound once the market stabilizes as their valuations are not demanding.
Further, the Investment Adviser thinks the recent commodity driven market rally is premature as a pick up in end demand has not yet been seen and is therefore reluctant to chase this rally and would rather wait for a better entry point. Having said that, the Fund has started to accumulate some export and yield plays as they have been under selling pressure during this rally as investors rotate money out of these names into high beta stocks.
The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 15/03/16 and are based on internal research and modelling.