The elation over more southbound buying reached a climax before the Chinese New Year. The MSCI China Total Return Index gained as much as 11.3%, before falling back and closing the month with a loss of 1%.
The spike in the US 10-year bond yield, from less than 1% at the start of the year to as high as 1.6% in late February, spooked the market due to fears of inflation following the economic recovery.
There was once again a clear rotation from high flying new economy stocks to old economy stocks, as the latter was expected to benefit the most from the economy re-opening. Commodity prices, such as Crude Oil and Precious Metals all soared to a year high.
In the period under review, high P/E stocks such as the Internet, Technology, Healthcare and Auto underperformed while low P/E cyclicals such as Banks, Property, Macau Gaming and Commodity plays, outperformed the market.
Interest in the Property sector finally returned after the sector greatly underperformed against the index in 2020. Property stocks appeared on the news as it was reported that 22 major cities had adopted a new land sale rule to concentrate land auctions to only 3 times per year.
Investors interpreted this move as positive, as the new rule implies more financial discipline from developers in land banking. Coupled with a deleveraging trend, the fundamentals of property developers are improving. We believe the Property sector, being deeply cyclical, is likely to re-rate and outperform this year. The Fund is overweight in this sector.
Domestic consumption was strong during the Chinese New Year holidays, because of the normalising economy and limited outbound travel. The sales value of China’s restaurants and retail increased 28.7% YoY and the national box office grew by around 35% YoY, despite a 75% capacity cap – according to data released by the government. We are positive on consumption plays that are geared towards the economy re-opening, Catering, Travel, Sportswear and Macau Gaming fall into this category.
The Strategic China Panda Fund declined by 1.4% in February, compared to -1.04% for the benchmark. Needless to say, the Fund’s exposure to high P/E stocks such as Internet and Sportswear were the main detractors. We are using the recent market sell-off to accumulate leading players in the new economy.
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.
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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 16/03/2021 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.