Reform measures set to unleash the potential for growth

By LILIAN CO

Monthly Fund Commentary
19 Jan 2017

By LILIAN CO

The sell-off of China stocks extended into December. The MSCI China index lost 4.10% in the month and ended 2016 with a return of -1.43%. Negative factors such as the renminbi depreciation, the spike in bond yields (both in China and the US) and fund outflows from emerging markets into the US continued to be in play, all thanks to the US Federal Reserve’s hawkish guidance on raising interest rates three times in 2017.

Light trading and profit-taking activities ahead of the year-end holidays further weighed on market sentiment. Similar to the MSCI China index, the CSI 300 also dropped by 6.44%. The underperformance of the CSI 300 versus the offshore China market was triggered by the regulator’s reprimand of a few insurance companies for their reckless investments in the A share market. Sector wise, banks and insurance companies saw profit-taking while oil names gained on the oil price spike. TMT stocks underperformed as the sector rotation from TMT into cyclical names continued.

The Central Economic Work Conference (CEWC) was held in mid-December. The tonesetting meeting put an emphasis on reform. Although the shift in monetary policy stance from accommodative to “prudent & neutral” along with the pledge to curb the housing bubble may drag the near term economy, a number of reform measures – including urbanization, SOE mixed-ownership and agricultural structural reforms are set to unleash the potential for growth in the medium-term. Most of the November macro data released continued to show improvement; this included the PMI, export growth, electricity consumption growth and retail sales growth figures. However, Capital outflows accelerated again given strong expectations of further renminbi devaluation. The Investment Adviser expects the government to further tighten capital controls in order to rein in the outflows.

The Fund declined 4.06% in December, slightly outperforming its benchmark by 4 basis points. Sector wise, paper & packaging stocks (over 5% of the portfolio) outperformed, while auto parts suppliers and education plays underperformed during the month. The Investment Adviser considers the market sell-off in December excessive as the macro trend in China has been broadly positive, and remains convinced that China stocks are undervalued, presenting trading opportunities 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 8/01/17 and are based on internal research and modelling.