Will the government’s aggressive response be the turning point?

The China stock market continued its decline in October, with the MSCI China Total Return Index returning -16.8% and marking a new-year low. There was a clear capitulation, selling by foreign investors, as the A-share market which is dominated by domestic investors reacted less violently with the CSI300 down only 7.8%.

Commentaire du Fonds
23 Nov 2022

The China stock market continued its decline in October, with the MSCI China Total Return Index returning -16.8% and marking a new-year low. There was a clear capitulation, selling by foreign investors, as the A-share market which is dominated by domestic investors reacted less violently with the CSI300 down only 7.8%.

Investors were disappointed with the result of the 20th Party Congress meeting re-election as the new seven-member Politburo Standing Committee was filled with President Xi’s allies.

A leadership team loyal to Xi means no fundamental change in policy direction as long as he is in power. This suggests that the common prosperity and zero COVID policies, perceived as market unfriendly, will be here to stay.

China’s GDP grew 3.9% YoY in Q3, recovering from the 0.4% YoY growth in Q2. That said, frequent regional lockdowns remain a drag on domestic consumption.

Retail sales in September only rose 2.5% YoY, down from 5.4% YoY growth in August. There were no positive signs in October’s Golden Week sales either.

China’s Ministry of Culture and Tourism reported tourism revenue declined by 26% YoY during the 7-day holiday. Retail sales in October and November are likely to trend even worse, as the COVID upsurge has intensified since then.

Property stocks also declined significantly during the month. The USD bond default by CIFI (previously considered among the safest privately owned developers) sent shock waves through the market. The liquidity risk of developers became the focus again as property sales weakened on the back of lockdowns.

The aggressive response from the government in early November to support lending to the sector will hopefully mark the turning point of this 2 year long down cycle.

The Strategic China Panda Fund slightly outperformed the benchmark in October by 0.8%. Little action was taken as the market overreacted to the reshuffling of members in the Politburo Standing Committee.

China is a deep-value market with the MSCI China at only 9x 2023 P/E. We remain patient regarding the Fund’s positioning awaiting the re-opening of China in 2023.

As always, we invite investors and prospective investors, to contact us should they wish to understand our views on the current situation and the positions held in the portfolio. Please do not hesitate to contact us for further information.

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

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The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 17/11/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.