Outperformance through sector allocation

The Chinese market remained in a narrow trading range throughout June. The MSCI China Total Return Index was flat for the month, ending the first half of the year with a return of +1.8%. The CSI300 Index, representing the onshore 'A' share market, was down 2.0% in June but ended the first six months with a slight gain of 0.2%.

MONATLICHER FONDSKOMMENTAR
15 Jul 2021

The Chinese market remained in a narrow trading range throughout June. The MSCI China Total Return Index was flat for the month, ending the first half of the year with a return of +1.8%. The CSI300 Index, representing the onshore ‚A‘ share market, was down 2.0% in June but ended the first six months with a slight gain of 0.2%.

The market was quiet in the lead up to the founding of the Communist Party of China Centennial on 1st July. Risk appetite increased slightly as concerns surrounding the US tapering dissipated following reassurance from the Fed, as reflected by a fall in the US 10 year bond yield rate. Internet stocks rebounded strongly as the regulatory clampdown appears to be coming to an end. A rally of the Nasdaq index also aided sentiment.

In an attempt to boost the otherwise falling birth rate in China, the birth policy has been relaxed further to now allow three children per couple. We are of the view that the new policy is unlikely to stimulate the birth rate. The government relaxed the one-child policy to allow two children per couple a few years ago, however, the birth rate in China has continued to fall. The high cost of raising a child and the rising level of education has discouraged people from having more children. This phenomenon is not unique to China, with many developed countries following the same trend.

Biotech stocks, particularly CDMO (Contract Development and Manufacturing Organisation) players, had a strong run in June. Wuxi Biologics, the CDMO market leader in China, increased profit growth guidance from 50% to 65% which excited the market. We are bullish over the prospect of CDMO players. The COVID-19 pandemic has turned out to be a blessing in disguise for them, as they are winning more COVID-19 related projects from foreign drug companies.

A few biotech companies such as Remegen, Innovent, and Akeso received approval for new drugs ahead of the June deadline for eligibility to bid for inclusion in the NDRL (National Drug Reimbursement List) in the second half of the year. We will focus on innovative drug companies which develop first-in-class and best-in-class drugs.

Sportswear stocks went from strength to strength as local Sportswear brands continued to record strong sales momentum on the back of patriotic buying from consumers who have boycotted foreign brands following the Xinjiang cotton incident. Li Ning issued a profit alert with over 60% sales growth and an improved margin in the first half of the year. The Strategic China Panda Fund is overweight in this sector.

Property Management stocks were back in the limelight this month as investors began strategic positioning ahead of interim result reporting. Many stocks in this sector are expected to issue positive profit alerts soon, with 60-80% profit growth. The Fund is also overweight in this sector for the strong secular growth, high earnings visibility, and strong cash flow.

On the other hand, Property Developers were under strong selling pressure as investors were dumping developer stocks and bonds. China Evergrande, the largest developer in China, was also under attack despite an announcement from the company that it had reduced net gearing and total debt quicker than expected. Aside from stock valuation, high yield developer bonds are in general trading at over 20% yield. We believe this is way overdone.

The Strategic China Panda Fund gained 6.4% in June, significantly outperforming the benchmark, which was flat. The relative overweight in Sportswear, Shipping and Healthcare names added 3.4%, 1.0%, and 0.7% respectively to the return of the Fund. This more than offset the drag from Property Developer exposure, which was down 0.8% in the month. Positions in Property Management and Education stocks were topped up.

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 are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 12/07/2021 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.