A switch from new economy to old

The intensifying regulatory overhaul on the Chinese Internet sector and the steepening of the US yield curve continued to take a toll on the market. The MSCI China Total Return declined 6.3% in March.

MONATLICHER FONDSKOMMENTAR
22 Apr 2021

The intensifying regulatory overhaul on the Chinese Internet sector and the steepening of the US yield curve continued to take a toll on the market. The MSCI China Total Return declined 6.3% in March.

The sell-off of Internet names continued as Tencent’s fintech business became the next clampdown target of the regulator, following Ant Group. This was aggravated by an unwinding of trades triggered by margin calls on Archegos Capital, a US hedge fund. The US 10-year bond yield spiked further to end the month at 1.74%, close to the pre-pandemic level from early 2020.

Investors were concerned about rising inflation risks resulting from Biden’s $1.9 trillion infrastructure stimulus plan. The above factors accelerated the flow of funds out of new economy stocks into old. Needless to say, high P/E stocks such as Internet, Technology and New Energy Vehicles (NEVs) were down-rated further; whilst value stocks such as Property and Banks continued to be up-rated.

China’s annual Two Sessions were concluded and the “Dual circulation” economy model was again emphasised, and the gradual exit from the monetary easing policy was also mentioned. In addition, the government also set the 2021 GDP growth target at 6%, below the market consensus of over 8%.

We do not see this as a negative though as the government is just being conservative, given the volatility in the post-pandemic global recovery. On the contrary, the year-to-date domestic economic recovery has been on track, with the majority of economic data released pointing to a strong rebound from the pandemic.

Property developers generally reported in-line results and guidance, which was well received by the market. Most companies estimate above 10% sales growth in 2021 and emphasised a deleveraging trend in order to meet the “three red lines” rule by 2022. Our focus is on companies with strong balance sheets and a quality land bank with growth potential.

The Sportswear sector performed well in March. A few global apparel brands like Nike, Adidas, Zara and Uniqlo announced a procurement ban of Xinjiang cotton, triggering a boycott from Chinese consumers. Local brands like Anta and Li Ning saw a sharp increase in sales on the back of patriotic purchases from consumers. The Fund is overweight to the Sportswear sector. Internet and Biotech companies reported better than expected results but were sold down on the back of hefty valuations.

The Strategic China Panda Fund outperformed the benchmark by 5.4%. The underweight in Internet and overweight in Property and Sportswear stocks were the major contributors to outperformance. We expect the switch from the new economy to the old to last in the short term. That being said, we still believe in the secular story of the new economy and will take the recent sector weakness as an opportunity to top up quality names.

As always, we invite investors and prospective investors, to get in touch if you would like to discuss the positions held in the portfolio or require further information.

Adam TurbervilleAdam Turberville
Director
+44 1481 742380
a.turberville@ericsturdza.com


The views and statements contained herein, including those pertaining to contribution analysis, are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 18/04/2021 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.