Property resurgence in China

The market rally extended into December on a slew of new, more relaxed policies for COVID and the Property sector. The MSCI China Total Return Index gained 5.2% in the month, ending 2022 down 21.9%, making it the second consecutive year of index decline.

Commentaire du Fonds
12 Jan 2023

The market rally extended into December on a slew of new, more relaxed policies for COVID and the Property sector. The MSCI China Total Return Index gained 5.2% in the month, ending 2022 down 21.9%, making it the second consecutive year of index decline.

The Renminbi against the USD strengthened further by 2.6% in December on the back of re-opening expectations, ending the year at 6.9, or down 8.5% for 2022.

In HK and China, the governments lifted nearly all COVID-related measures. Quarantine and COVID testing requirements for inbound travellers were scrapped and China’s borders will officially reopen on the 8th of January, ending the three-year battle against COVID. Given the abrupt relaxation, COVID infections have increased across the entire country at a record pace.

It is estimated that at least half of the population has been infected and COVID cases in tier-one cities are even said to have reached a peak in December. Inevitably, near-term economic activities are impacted greatly as a large portion of the population is at home ill. The silver lining is that a V-shaped recovery in one to two months is likely, given the current run rate of COVID infections.

On the Property side, the government has ordered the top 4 state-owned banks to issue offshore loans to developers if the latter can provide domestic assets as a pledge. This is the first time the government has specifically mentioned supporting developers in refinancing overseas debt. Both Property bonds and Developer stocks had a strong run on this news.

A number of developers such as CIFI, KWG, Agile and Country Garden took the opportunity to implement a share placement to strengthen their balance sheets.

Not surprisingly, macro data in December will likely continue to deteriorate from the COVID resurgence. However, investors should be willing to see through this near-term weakness. We expect economic activities to recover as soon as February (or right after the Chinese New Year).

The Strategic China Panda Fund climbed 4.1% in December. We believe a large part of the underperformance in 2022 was attributed to the overweight in the Property sector, which did not perform well throughout the year.

Now that the COVID policies have been scrapped and strong supporting policies on the Property sector have been released, we are hopeful for a strong recovery in 2023. The Fund’s Property weighting was increased again in December.

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 10/01/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.