Government tightening measures cool the property market

BY LILIAN CO

Monthly Fund Commentary
18 Nov 2016

BY LILIAN CO

China stocks lost momentum with the MSCI China index down 1.95% in October on resurging concerns of a Renminbi depreciation and a risk-off stance ahead of the US presidential election. Southbound buying moderated after a strong influx in the third quarter and this also weighed on the market. The accelerated devaluation of the Renminbi as soon as it was included in IMF’s Special Drawing Rights Basket on 1st October hurt market sentiment.

Sector-wise, commodities and basic material stocks outperformed on rising underlying commodity prices. Education stocks also did well on earnings results beating expectations and strong guidance. Property stocks sold down however on increased tightening of the property market. Other underperforming sectors included internet, telecoms and yield plays. Telecom stocks were under selling pressure after the cancellation of roaming and long distance call charges while yield plays were down on fears of a likely interest rate hike in the US. The A share market bucked the trend with the CSI 300 index up 2.55% for the month as domestic investors turned more positive on the stabilising macro trend.

China’s GDP growth in the third quarter was 6.7%, the same as during the first half of 2016 and as such was no surprise to the market. The Investment Adviser expects GDP growth to trend at a similar rate in the next few quarters under the visible hands of the Chinese government. September macro data was, in general, stable with trade being the only exception. Exports were down 5.6% year on year, in stark contrast to the positive export growth seen in the previous few months. During October’s golden week, the government unexpectedly widened tightening measures in the property market to include over 20 cities. Property transaction volumes and selling prices dropped instantly. Since the Fund sold out its positions in property stocks in early October, the Fund did not suffer from the sector sell off. Having said that, the Investment Adviser believes property companies are, in general, better positioned in this cycle as many have been much more disciplined in expanding their land banks and hence have stronger balance sheets.

During October, the Fund was flat, outperforming the benchmark by 1.93% in the period under review. The underweight to financials and internet sectors added value as those sectors underperformed. Of particular note, a position in a garment company contributed nearly 1% to the Fund, as it received a buy-out offer from a third party. The position in the stock was 1% at the beginning of the month and jumped nearly 100% in October. The exposure to the education sector also contributed over 50bps to the Fund, thanks to stronger than expected quarterly results and guidance. Currently, the Fund has over 6% in this sector. During the month, the Investment Adviser added to the TMT (Technology, Media and Telecom) sector and took profits on yield plays.

The recent surprise win by Donald Trump in the US presidential election has triggered a large sell off in Chinese equities given his hostile stance towards China. It remains to be seen whether he will soften his tone once he takes office. The Investment Adviser believes the likelihood of the US imposing punitive import tariffs on Chinese goods is low as it would trigger immediate retaliation from China. After all, China is also an important market for the US. A trade war between China and the US is not necessarily in the best interest of America. The Investment Adviser remains comfortable with the positioning of the portfolio and sees the recent market volatility as an exact repeat of what was seen back in the first quarter of this year (during which the market plunged following Chinese government policy mis-steps) and in June after Brexit. On both occasions, the market rebounded sharply after an initial selloff. There is a strong possibility of a relief rally once Trump sends out more market friendly messages to investors.

 

The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 17/11/16 and are based on internal research and modelling.