Near term risks could create a buying opportunity

BY LILIAN CO

Monthly Fund Commentary
21 Jun 2016

BY LILIAN CO

The MSCI China index was down 1.02% in May with low turnover. Soft macro numbers and policy inconsistency by the government triggered a market sell off in the early part of the month but most of the losses were recouped subsequently on speculation A shares will be included into the MSCI China index and on the forthcoming launch of the Shenzhen-HK stock connect.

Education and internet service platform companies were the top performers, after reporting better than expected quarterly results. Consumer staples gave back some of their gains, due to weak top line growth. The hardware technology sector lagged the market given weak customer demand. The performance of China ADRs was mixed in the run up to MSCI rebalancing the index at the end of the month. ADRs with a privatization angle collapsed as the Chinese regulator weighed curbs on backdoor listing and relisting on the A share market.

The negative comments on the recent stimulus measures and economy by “the authoritative person” in an interview with a major state media outlet was a negative surprise to the market. It did not only signal no more stimuli in the near term, it also demonstrated the political struggle at the top level. This is not conducive to investment decisions in the private sector. On the macro front, April macro data moderated as expected with weaker PMI, industrial production growth and Fixed Asset Investment growth. Industrial profit growth also softened to 4.2% from 11.1% in March. Total Social Financing (TSF), new bank loans and M2 growth in April all came in lower than the market consensus after the spike in March. The PBOC’s first quarter monetary policy report stated the policy stance as “appropriate flexible” and contained no language of “loosening bias”.

The Fund was down 0.1% in the month, outperforming the benchmark by 0.92%. The Investment Adviser trimmed some positions in Auto OEM companies, as selective auto sales were negatively impacted by the rising dispute between dealers and OEM manufacturers and the lack of new model launches. The Fund also took profits in selective ADRs and added a position in an auto parts manufacturer with accelerating overseas revenue growth and margin expansion.

The Investment Adviser continued to increase weightings in the telecom sector based on defensive fundamentals. The Investment Adviser sees near term risks in the market as the market is pricing in the A shares inclusion into the MSCI China index and expects to “sell on fact” upon the MSCI announcement on June 15 be it a yes or no decision. Other near term external events such as interest rate hikes in US and potential Brexit are also likely to create volatility in the market. Nevertheless, the Investment Adviser sees a range-bound market. If the market corrects further on the above events, this would be seen as a buying opportunity.

 

 

 

The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 14/06/16 and are based on internal research and modelling.