BY LILIAN CO
In May, China stocks simply went from strength to strength. The MSCI China index soared another 5.1% in May, making it the fifth consecutive monthly gain this year. Financial deleveraging and rising bond yields only had a short-lived impact on market sentiment.
Financial stocks such as insurance companies and property stocks staged a strong comeback after an initial sell-off as investors took comfort from the government’s ability to inject liquidity into the financial system when needed. On the contrary, technology stocks were under heavy selling pressure. A short seller report on AAC Technologies, (a bellwether of the technology sector) and a share placement triggered profit taking across the board in the sector. Outperformers in the month included auto, internet, insurance and education names.
Since the government adopted a tightening bias some time ago, we have started to see a moderating macro trend as shown by April data. Indicators such as PMI, industrial output growth and PPI have all softened. Now that the economy has performed better than expected in recent quarters, the government’s focus is back on financial stability and reform.
The Fund was up 2.1% during the month, behind the benchmark by 3.0%. The Fund’s exposure to the technology hardware sector (12% in the Fund) was the major drag on performance, detracting 2.1% from the Fund, despite an overall rising market. AAC Technologies, a bellwether in the space, was attacked by a short seller report which questioned the company’s high margin and related party transactions. Its share price plunged by 27.7% and the stock was subsequently suspended, triggering panic selling across the sector. The portfolio has 5% in AAC and this position alone detracted 1.7% from the monthly return. However, the Investment Adviser sees this as a storm in a tea cup; the stock resumed trading in early June and staged a strong comeback after the accusations in the short seller report were found to be groundless. The underweight in internet names also detracted from performance in May as the sector had a strong run in the period. The Fund is underweight Tencent and Alibaba by default given the single stock limit of 10% because these stocks account for 15% and 11% of the MSCI China index respectively.
The Investment Adviser would not be surprised to see market pull back after its strong run year to date, and will remain a buyer on any market weakness.
The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 13/06/17 and are based on internal research and modelling.