Lilian Co, portfolio manager of the Strategic China Panda Fund – an award-winning China Equities Fund – provides an update on the Fund’s positioning and her latest insight on the Chinese equity markets during this volatile period between the U.S. and China.
Recorded: Monday, 17th June 2019.
The transcript of the interview is provided below:
How is the current macro environment impacting Chinese equity markets and your bottom-up approach?
The macro view is dominated by trade talks between U.S. and China and clearly sentiment is the dominating factor right now. So far, the impact of import tariffs on Chinese GDP is less than one percent, so it’s not very significant. But if the tariffs on the remaining 300 billion worth of Chinese goods is imposed, we will see a bigger impact to the Chinese economy. Maybe it will take off another one percent after GDP.
Yes, it’s bad, but we don’t think it is the end of the world for China because the Chinese government will surely respond with more stimulus, both in terms of monetary stimulus and fiscal stimulus. We have already seen more measures from the government since the beginning of the year and we think that the government will keep on doing more to contain the slowdown in the economy.
Near term sentiment definitely dictates the investment direction, but we feel that bottom-up research is still the key to investment in the long-term, because at the end of the day, investors react to fundamentals. The trade war is something that will hurt the short-term trading sentiment, but I think it will eventually be resolved.
How did the 2018 market correction impact the Fund and its underlying exposure?
The fund was actually well-positioned in the first part of 2018, in sectors like consumer discretionary, Chinese property and technology and it all performed well until the sudden implementation of import tariffs by the U.S. and that was clearly a shock to the markets.
We didn’t really adjust our portfolio a lot except the exposure to technology because we realized that technology was the key battlefield in this conflict between the U.S. and China. We didn’t really adjust our exposure to other sectors. We saw that the situation was too fluid to make any big changes and, it turned out to be the right call because in early 2019, market has a big rally and what got so down in 2018 came back, strongly in the first half of 2019.
2019 has seen strong returns. What are the drivers and is it sustainable?
The expectation of a likely trade deal and the stepped-up stimulus from the Chinese government were the major drivers of the rally in the first part of 2019.
Stocks were too oversold, I mean, too much bearish sentiment in the market at the beginning of the year. So as soon as we got slightest positive news, investors just reacted very aggressively and so we saw a big jump in stock prices in the first part of 2019.
But of course, whether or not the rally is sustainable really depends on the outcome of the trade war. Right now, the situation is not very promising, but we think that a trade deal will be reached eventually, it’s just a timing issue because everyone knows that the consequence of a trade war between China and the U.S. is unbearable for both countries. So it’s not just that China will get hurt, I think U.S. will also get hurt because import tariffs on Chinese goods is effectively a tax on U.S. consumers.
Any changes to the portfolio and what trends are you focused on?
We try not to make big changes to the portfolio because of the fluid situation. We see that the consumption upgrade trend in China being a structural trend. Although economy slowdown in near term may slow down this trend, we think that this is a long-term structural trend that cannot be reversed. So we continue to focus our research on domestic consumption and especially in areas where we focus on the market leaders that have strong brand equity.
What are your current positions within the portfolio?
At the moment, we are underweight TMT, technology and internet, and we avoid high PE stocks because they are uprising in a lot of growth expectation and in an uncertain environment like this, we think that they can have a big derating risk if they do not meet expectations and so I think the key overweight in the portfolio is Chinese property and consumption themes.
What are the highest conviction names currently in the portfolio?
One of my highest conviction names, Times China Property, is a Chinese property developer and is trading at very cheap valuation about four times PE and dividend yield is quite decent at about six to seven percent, and yet the growth is respectable. We still expect another 20 to 30 percent earnings growth in the next few years, I mean the company is gaining market share, they have good financial strength. So we continue to like this name and actually Times China is not the only Chinese property stock that we like, we also have other Chinese names that are also trading at cheap valuation with good dividend yield support. I think the key essence of our investment is that we want to identify names that trade at cheap valuation with good dividend yield support because these are the best downside support in an uncertain environment.
For Professional Investors Only.
Disclaimer: The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the E.I. Sturdza Strategic China Panda Fund as of 17/06/2019 and are based on internal research and modelling. This does not constitute independent research and under no circumstances should the information contained therein be used as a recommendation to buy or sell any security or financial instrument or service or to pursue any investment product or strategy or otherwise engage in any investment activity or as an expression of an opinion as to the present or future value of any security or financial instrument. Nothing contained in the views and statements by LBN Advisers Limited are intended to constitute legal, tax, securities or investment advice. The views and statements contain “forward-looking statements”. All projections, forecasts or related statements or expressions of opinion are forward-looking statements. Although LBN Advisers Limited believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct, and such forward-looking statements should not be regarded as a guarantee, prediction or definitive statement of fact or probability.
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