Risk appetite for emerging markets returns on renewed expectations of developed world easing

BY LILIAN CO

Monthly Fund Commentary
17 Aug 2016

BY LILIAN CO

The offshore China market rallied in July, thanks to risk appetite towards emerging markets returning on renewed expectation of monetary easing in the developed world post Brexit. The MSCI China total return index rose 3.51% in July, regaining most of the lost ground year-to-date.

The CSI 300 index (i.e. the onshore China market) also rose by 1.6% in the month but underperformed the MSCI China index on negative regulation headwinds. Internet, textile and telecom sectors outperformed the market, while defensive names such as those in healthcare lagged. Energy stocks also underperformed as crude oil slumped almost 15% on weak global demand.

Second quarter GDP in China was up 6.7% yoy. The growth rate was the same as the first quarter and in line with the government’s full year target of 6.5 to 7%. The Investment Adviser has no doubt about the government’s capability in reaching the full year target as there is ample room for the government to manoeuvre given its strong financial standing. Having said that, there is no urgency for further easing or stimulus in near term as the recent macro trend is stable.

The Fund rose 5.7% during the month, outperforming the benchmark by 2.37%. Some of the Fund’s top holdings such as Texhong Textile, China Mobile and Tencent were major performance contributors. Texhong Textile posted a strong gain after issuing a positive profit alert. Share prices of Nexteer and SITC also recovered after the slump last month. As for CK Hutchsion and Power Assets (stocks with heavy UK exposure), their share prices came back strongly post Brexit. However, healthcare stocks underperformed as investors preferred beta to defensiveness. The Investment Adviser trimmed positions in names that have had good run (e.g. internet and auto component stocks). The Fund increased positions in environmental protection, property and selective auto names in anticipation of strong sales and new order wins.

Again, the Investment Adviser sees confusing views at the top level. The National Development Reform Commission (NDRC) researchers made rare public comments about more rate cuts being appropriate. Interestingly, the comments were deleted from NDRC official website soon after. The central bank still holds the view it will maintain a prudent monetary policy since capital outflow pressure remains. The bank regulator has issued a consultation paper on stricter Wealth Management Product (WMP) rules while the securities regulator has imposed stricter rules on the use of funds raised from capital markets for developers. Although the stricter rules have a negative impact on A shares in the short term, they should lead to a healthy development of the capital markets in the long run.

Now that Brexit has been played out and interest rate hikes in the US look set to be postponed again, equities are in a sweet spot. Given the cheap valuation of Chinese equities and expectation of the imminent Shenzhen-HK stock connect, the Investment Adviser sees fund inflows continuing in the near term and will continue to deploy cash where opportunities lie.

 

The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 15/08/16 and are based on internal research and modelling.