Strong recovery for China

Chinese stocks had a good start to the new year, with the MSCI China Total Return Index surging by 11.8% in January. Risk appetite for China immediately returned after the government lifted the zero-COVID policy last December and investors have started positioning for a strong China recovery in 2023, after two years of down markets.

Given this positive macro outlook, the Renminbi against the USD continued to trend up, gaining 2% in the month. Sector-wise, Internet, Technology and Sportswear outperformed, while Property underperformed the market.

The impact of the COVID outbreaks on the economy was not as damaging as feared. GDP growth in Q4 reached 2.9%, better than the market expectation of 1.6% despite recurring regional lockdowns during the period. 2022 GDP growth was 3%, a marked slowdown from 8.1% in 2021.

Although the overall macro trend in December remained weak, the decline in retail sales narrowed. As China has now re-opened, we expect a strong recovery on the release of pent-up demand.

It was reported that domestic tourism revenue during the Chinese New Year holidays has already reached 73% of the 2019 level. Box office revenue for the period was even stronger, exceeding the 2019 level by 13.8%.

Sportswear companies outperformed the market through good sales recovery and destocking progress. Companies such as Anta and Xtep released their Q4 operating data and even though the data showed the inventory and discount levels had slightly worsened QoQ, the companies indicated that the recovery trend was strong. Channel checks with distributors showed domestic brands had a strong sell-through, with double-digit growth during the Chinese New Year period.

Macau’s gross gaming revenue in January recovered significantly, to 46% of the 2019 level, compared to 15% last December. Property sales dropped 32% YoY in January due to the calendar shift of the Chinese New Year holiday this year. Physical market recovery has yet to be seen following the recent policy push.

The Strategic China Panda Fund climbed 9.9% in January. The underweight in Internet and overweight in Property dragged on performance. China’s re-opening should be priced in after the MSCI China Index jumped nearly 50% from its low.

Although market valuations remain cheap, we expect the market to trade sideways over the near term. We view the two government sessions in March as the next re-rating catalyst as they are likely to unveil more measures to revive the economy.

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 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 15/02/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.