Investors expected to revisit fundamentals – once dust has settled…

BY LILIAN CO

Monthly Fund Commentary
18 Aug 2015

BY LILIAN CO

The market downward trend extended to July with major China indices such as the MSCI China and CSI300 plunging another 10.9% and 14.7% respectively. High levels of stock suspension at a time investors really needed liquidity, and the interventionist policies from the government panicked investors. At the climax, a total of 1,472 A-share companies were suspended from trading, representing 51% of all A-share listings. By month end, 517 companies (or 18% of total listings) were in trading halt.

The Greek debt crisis, albeit resolved later in the month, also hurt market sentiment. There was an indiscriminate sell off of Chinese stocks and small cap names in HK as they were an obvious funding source when investors had difficulty in liquidating their A-share positions.  Among major sectors, cyclical stocks such as brokers, autos, oil, steel and coal all underperformed. 

The real economy remained weak.  In June, monthly auto sales reported its first decline in the past 24 months, while PMI remained stagnant at 50.2 (commensurate as May 2015). The Investment Adviser expects more aggressive monetary and fiscal policies to be introduced in the coming months. The State Council has pledged more urbanisation-related investment through bank lending and the issuance of bonds. The Investment Adviser believes a combination of both monetary and fiscal easing measures should help strengthen economic recovery.

It is believed that the Central Government has already spent over Rmb1 trillion to support the A-share market. The Investment Adviser believes that the China Securities Regulatory Commission (CSRC) will continue to stabilise the market and prevent systematic risk.  The CSRC has confirmed that the state-backed China Securities Finance Corp., has not “exited” the stock market and would be prepared to increase stock holding at the right time. Likewise the CSRC has also encouraged lenders to roll over loans backed by shares and asked banks to support companies’ share buybacks by offering collateralised loans. With all such supportive policies in place, the Investment Adviser expects the A-share market to stabilise soon – a stable A-share market is a pre-requisite for H-shares to perform.

The Fund was down 10% in July, slightly better than the benchmark which was down 11%;  the portfolio’s exposure to A and B shares alone accounted for -2.5%.  The Fund gave back the good performance in the previous month during which A-share market tumbled despite the A and B exposure producing a 1% positive gain.  Large cap stocks (the portfolio focus) in the A-share market were under tremendous selling pressure because they were the only funding source for investors when almost 50% of the stocks (mostly small and mid cap) listed in the A-share market were at one point suspended from trading. The Investment Adviser took advantage of the recent market rebound to cut the Fund’s A and B share positions; to 11.4% as of end of July, down from 22.8% as of end of June.  Sector-wise, the worst performing in the portfolio were auto and the internet which were down 1.54% and 1.32% respectively.

The Investment Adviser saw a big dislocation of asset prices in this recent sell off and believes such disorder to be short-lived and expects investors to revisit fundamentals once the dust has settled.  The Investment Adviser also anticipates the re-rating potential of H shares as the MSCI China p low-cost (at 10 times only) post the market correction.

The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 12/08/15 and are based on internal research and modelling.