Internal controls – external sanctions

Chinese stocks returned to a declining trend after taking a breather during August. The MSCI China total return index fell by 14.6%, breaking the July’s year-low. A stock market retreat in the US on the back of a worse than expected inflation outlook; in addition to constant regional lockdowns in China and Renminbi weakness contributed to the slump.

Commentaire du Fonds
18 Oct 2022

Chinese stocks returned to a declining trend after taking a breather during August. The MSCI China total return index fell by 14.6%, breaking the July’s year-low. A stock market retreat in the US on the back of a worse than expected inflation outlook; in addition to constant regional lockdowns in China and Renminbi weakness contributed to the slump.

The Renminbi to US Dollar weakened by 3.1% MoM, a cumulative decline of 10.7% over the first nine months of 2022. That said, the year-to-date Renminbi weakness is not outrageous when compared to other major currencies. Sector wise, Banking and Macau Gaming outperformed while Internet, Technology, Auto and Sportswear underperformed.

The 20th Communist Party Congress meeting is due to take place in mid-October. Senior leaders are to be selected and Xi Jinping is likely to be re-nominated as president for another 5 years. We expect major policy tones, such as the zero COVID plan and the “houses are for living in, not for speculation” principal to stay. Despite little surprises, we expect the government to be more forthcoming in rolling out stimulus measures, once the leadership is finalised.

Macro data for August remains mixed. The major highlight is better than expected inflation. This is a big contrast to the western world and should give the policy makers more leeway in monetary easing. The Sportswear industry, which used to be resilient to economic weakness, began to feel the sales impact from regional lockdowns. Property sales remained in the doldrums during the otherwise “Golden September” (traditionally a high season for property sales).
The US imposed further sanctions on China technology – exports of advanced graphics processing units designed by Nvidia and AMD to China were restricted as a way to impede the development of China’s AI industry.

The  Strategic China Panda Fund outperformed the benchmark by 1.5% in September. The overweight in Macau Gaming added value whilst the underweight to Banks and Internet detracted value. We await news from the 20th Communist Party Congress meeting for more cues.

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 17/10/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.