‘A’ Share market the focus of the month

By Lilian Co

Fund Commentary
23 Jan 2015

By Lilian Co

Bullish sentiment extended into December as investors bet on more monetary easing after the surprise rate cut in November.

In late December, the Government relaxed the definition of loan to deposit ratio (effectively a cut from 71.5% to 65.4%) and the reserve requirement ratio (from 19.7% to 18%), moves which added further fuel to the market rally. Banks and insurance companies (35% of the Index) were up 10-20% in the month, whilst non financials continued to be sold down to fund the purchase of financials, with Index heavyweights China Mobile and Tencent down 5.3% and 9.3% respectively for example.

The A share market was clearly the focus during the month. The CSI 300 Index soared 25.8% while the MSCI China Index was up a mere 1.2%. After the recent rally, the ‘A’ share market is no longer distressed with the CSI 300 Index trading at 11x 2015 P/E (versus 7x for the previous six months). It appears that in hindsight, investors under-estimated how violent the market would react to the interest rate cut. The increasingly popular margin financing which provides leverage to investors has had a multiplier effect for the rising market with the stock market in a sweet spot in the near term. The Investment Adviser believes that firstly, any negative macro data will only invite expectation of a further rate cut and  secondly, the likely announcement of the inclusion of ‘A’ shares into the MSCI China Index during the mid-year review, will keep interest in ‘A’ shares high.

The Chinese Government has finally turned supportive of the property sector after several years of maintaining a hawkish stance. Home purchase limit removal, relaxation of the mortgage policy and the recent interest rate cut are very positive development for the sector. There has been an increase of transaction volume since the fourth quarter of 2014 and hence raised investor interest in this sector. Sector P/E is cheap at 5.5x 2015 with 44% discount to NAV, below the historical trading range.

As a net importer of crude oil, China stands to benefit from the recent collapse in the price of crude oil. Industry wise, airline, shipping and downstream manufacturing which use crude oil as input cost will see immediate cost savings. Consumer discretionary plays will also be indirect beneficiaries as a drop in the oil price is a de-facto tax cut on consumers. As a consequence, the Investment Adviser has added exposure to shipping companies, downstream manufacturers and consumer plays (e.g. home appliances) to the portfolio.

The Fund was down 4.4% in December, despite a buoyant market. Not only did the stocks in the portfolio fail to participate in the rally (given limited exposure to financials), they were sold down as investors rotated out of non-financials and into financials. Tencent, the Fund’s top holding with over 8% weight in the Fund, was down 9.3% in December. This stock alone detracted 0.79% from the Fund in performance terms. Now that the financials have had their run, the Investment Adviser expects to see better risk reward for non financials.

Commentary provided by LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 13/01/15.