More easing or stimulus required to meet the government’s GDP growth target

BY LILIAN CO

Monthly Fund Commentary
17 Dec 2015

BY LILIAN CO

Profit taking emerged after a strong October with poor economic numbers and the non-stop arrest of government officials and top management of SOEs (this time in financial sector), dampening market sentiment. The market slump was quite broad based, led by IPPs, airlines, oil and gas, and Macau gaming. Nevertheless, US ADRs held up quite well in the run up to their inclusion in the MSCI China index. The A share market outperformed HK with the CSI300 index up 0.9% and MSCI China total return index down 3.4% in the month. Companies with high growth visibility were re-rated further as investors were willing to pay a premium for earnings certainty amidst a sluggish economy.

The Chinese government resumed IPOs and tightened margin financing to curb excessive market leverage given the stabilizing A share market sentiment. Market reaction to this was muted. The economy has yet to see signs of recovery as demonstrated by lackluster October macro data. The PMI came in at 49.8, unchanged from the September level. Trade was disappointing with exports down 6.9% yoy and imports down 18.8% yoy. Consumption was the bright spot with resilient retail sales growth of 11% yoy. The government has set 6.5% as the annual GDP growth target from 2016 to 2020, however, with the current economic backdrop, the Investment Adviser believes that more easing or stimulus is necessary to reach this target. As expected, the IMF announced the inclusion of the Chinese Yuan to its reserve-currency basket with a 10.92% weighting, effective October 2016. This should boost demand for the Yuan in the long term although the Investment Adviser sees devaluation pressure in the near term due to a weak economy.

The Fund was down 1.3% in November, outperforming the benchmark. The A and B share exposure (10% of NAV) generated a positive return and was partially responsible for the Fund’s outperformance during the month. Cash levels remained stable. The Investment Adviser took advantage of the market rebound to trim positions in some of the Fund’s top holdings. Furthermore, the Investment Adviser remains focused on stock selection and is happy to take profits if the price is right.

The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 14/12/15 and are based on internal research and modelling.