Renewed hopes of a trade truce

The MSCI China Index and CSI 300 Index staged a relief rally after the slide in May, gaining 8.0% and 5.4% respectively on the back of renewed hope of a possible Sino-US trade truce and rising expectations of interest rate cuts in the US, taking returns to 13% and 27% respectively in the first half of 2019.

Monthly Fund Commentary
24 Jul 2019

The MSCI China Index and CSI 300 Index staged a relief rally after the slide in May, gaining 8.0% and 5.4% respectively on the back of renewed hope of a possible Sino-US trade truce and rising expectations of interest rate cuts in the US, taking returns to 13% and 27% respectively in the first half of 2019.

According to the Investment Adviser, news regarding the US-China trade talk has become a swing factor again, dictating the stock market’s direction. The Renminbi strengthened by slightly more than 1% against the US Dollar in June. During the month, sportswear, education and property stocks outperformed, while banking and healthcare stocks underperformed.

At the end of June, trade talks resumed after Trump and Xi met and struck a truce on the sidelines of the G20 meeting. As a gesture of goodwill, Trump held off imposing tariffs on an additional US$300 billion worth of goods over the next few months. He also announced that US companies could resume business with Huawei, provided the products involved did not threaten national security, which is supportive for the technology supply chain.

Accoridng to the team, fundamentals with regards to sportswear companies continued to buck the trend in terms of economic slowdown. The leading domestic player, Li Ning, announced a positive profit alert, with Anta and Xtep also citing resilient Same-Store-Sales growth in the second quarter. The Investment Adviser remains bullish on the sustainable growth of the sportswear sector.

During the month, the policy overhang continued to haunt the healthcare sector, with the Ministry of Finance planning to conduct random inspections of pharmaceutical companies’ accounts. This would allow the government to have a transparent view of the healthcare manufacturers’ cost structure and pave the path for future price cuts. In Hong Kong, a number of large scale demonstrations against the controversial extradition bill sent the shares of HK retailers down following sinking retail sales.

The Fund gained 9% in June, outperforming its benchmark by 1% and translating into a half-year return of 16.8% on an absolute basis, an excess return of 3.8%. The Fund’s overweight to the property sector and stock selection within the sector, were the major contributors to the outperformance during the month. The Fund increased exposure to China property and Macau gaming stocks, while reducing exposure to packaging paper stocks in June.

Watch Lilian’s latest interview on: Chinese Equities: Fundamental investing in light of the U.S. and China trade talks >

 

The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 09/07/19 and are based on internal research and modeling.