Domestic consumption remains robust

BY LILIAN CO

Monthly Fund Commentary
17 Feb 2017

BY LILIAN CO

China stocks staged a strong comeback in January. The MSCI China index soared 6.79% and CSI 300 index climbed 2.35% in the first month of 2017. An asset reallocation from emerging markets, including China, to the US post Trump’s election win was over by the end of fourth quarter of 2016. This year, cheap stock valuations, a Renminbi rebound and improving macro data has renewed investor interest in China.

Southbound buying, which subsided in December, remained the major driver of the market rally. Internet, auto, material and healthcare stocks outperformed while financials and some utility names lagged.

The January manufacturing PMI reached a respectable 51.3%. Overall retail sales during the CNY holidays grew 11.4% YoY, faster than the same period in 2016. Car sales in January remained strong despite a purchase tax subsidy cut taking effect in 2017. Clearly, domestic consumption has remained robust despite tightening auto and property policies. A consumption upgrade trend is also apparent.

Ahead of Chinese New Year, the People’s Bank of China (PBOC) injected liquidity into the system as usual. After Chinese New Year, the PBOC immediately raised the reverse repo and standing lending facility rates to rein in excess liquidity. The Investment Adviser believes the PBOC’s move is to support the Renminbi, curb inflationary pressures and avoid asset bubbles. Given the positive start to the year, we are likely to see upside risk to the first quarter GDP growth. This may translate into positive surprises in corporate earnings growth.

The Fund rose 8.61% in January, outperforming the benchmark by 182bps. The overweights to technology, education stocks and paper packaging names added value. During the month, the Fund took advantage of the weakness of exporters to top up exposure as the Investment Adviser believes a trade war between the US and China is unlikely. The cash level of the Fund fell to 4% at the end of January versus 7% at the end of December. The recent market rebound has not come as a surprise to the Investment Adviser as China was oversold in the fourth quarter, in fact, the Investment Adviser believes this market rally has further to run as China remains a very underweight market for global investors despite improving macro data.

 

The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 13/02/17 and are based on internal research and modelling.