June export growth above expectations

After a dismal June, Chinese equities continued to fall in July as trade tensions between China and the US continued to build. The MSCI China Index lost 2.5% during the month, while the CSI 300 stabilised with a slight gain of 0.2%.

Monthly Fund Commentary
22 Aug 2018

After a dismal June, Chinese equities continued to fall in July as trade tensions between China and the US continued to build. The MSCI China Index lost 2.5% during the month, while the CSI 300 stabilised with a slight gain of 0.2%.

After a 3.3% loss in June, the Renminbi (Rmb) plummeted by another 3.0% in July. Sector wise, healthcare, property and technology underperformed, while utility, banks, insurance, and materials outperformed.

The 25% import tariff on USD34bn worth of Chinese imports became effective on 6th July and was immediately met by China imposing import tariffs on equivalent US imports. As previously indicated, Donald Trump retaliated against China’s counter measures with a 10% import tariff on an additional USD200bn worth of Chinese imports, overall leading to over 50% of Chinese imports being subject to punitive import tariffs. At present there are no signs of either party backing down, although China has become less vocal recently.

To reduce the negative economic impact of the prolonged trade deadlock with the US, China fine-tuned its tightening bias amidst financial deleveraging. Firstly, the People’s Bank of China (PBOC) released a less stringent asset management rule on banks and secondly, the State Council adopted a more proactive fiscal policy through increased infrastructure spending. The Investment Adviser perceives this as a move in the right direction. This said, the government has not loosened its approach with regards to property policy.

Healthcare stocks took a hit in July following a vaccine scandal at Changsheng Biotechnology (A share listed company). High valuations made the sector particularly vulnerable to negative news amidst weaker market sentiment.

China’s GDP growth accounted for 6.7% in Q2 2018 (versus 6.8% in Q1), in line with market expectations. At the same time, June export growth was above expectations despite the ongoing trade war disputes. During the month, bank loan growth accelerated at the expense of shadow banking. According to the Investment Adviser, a slowdown in GDP growth is likely to be contained during the second half of the year despite trade war uncertainty due to macro tightening being relaxed.

The Fund lost 4.8% in July. The overweight in property and technology stocks continued to drag on performance, while the underweight in banks further detracted value as the sector posted positive gains in the falling market.

The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 14/08/18 and are based on internal research and modelling.

For detailed performance information based on complete 12-month periods since inception, please refer to the Fund’s factsheet, which is obtainable from https://eisturdza.com/funds/fund-documents.