Financials as the month’s market darling

BY LILIAN CO

27 Feb 2018

BY LILIAN CO

Chinese stocks started 2018 with a bang, with the MSCI China Index soaring 12.5% and the CSI Index increasing by 6.1% in January. A strong US market and southbound inflows (especially into financials) were the major drivers behind the market rise. Needless to say, financials stood out as the strongest performer during the month.

Cyclicals such as coal, cement and steel also surged on the back of increasing product prices. Technology hardware and auto, the winning sectors in 2017, however struggled throughout the month.

Both, the Chinese regulator and HK Stock Exchange (HKEx) kick-started the year with a series of listing reform initiatives. Firstly, China unveiled a plan to allow the conversion of non-tradable H shares to free-floating shares. Secondly, the HKEx announced a plan to allow for a dual class structure to be implemented during the second half of 2018. It is anticipated that these initiatives will attract more Chinese companies (including those already listed as ADRs in the US) to list in HK, boosting the region’s competitiveness as a capital raising platform for Chinese companies (especially new economy companies).

In 2017, China’s GDP grew by 6.8%, slightly ahead of the 6.7% consensus target. December retail sales growth (+9.4%) was slightly below the low double digit growth during previous months. Throughout the month, inflation remained in check with the Consumer Price Index (CPI) currently standing at 1.8%. In January, airline stocks increased further following government plans to implement structural reforms in the airline industry, aiming at airfare liberalisation.

The Fund gained 9.4% in January. The portfolio’s underperformance during the month can be primarily attributed to its underweight exposure to banks and telecommunication services, as well as its overweight in technology hardware and auto stocks. Since December, the team has started to build exposure to Chinese banks, increasing the sector weighting from zero to 8.6% (as at the end of January), but so far still falling short of the index sector weight of 14.3%.

The euphoric run of the market came as a surprise for the Investment Adviser. Although the team remains comfortable with market valuations and underlying fundamentals, a near term correction appears inevitable. The Investment Adviser thinks the recent market   correction provides an excellent entry point for investors.

The views and statements contained herein are those of the LBN Advisers Limited in their capacity as Investment Advisers to the Fund as of 14/02/18 and are based on internal research and modelling.