Ample room for RRR and interest rate cuts


Fund Commentary
24 Mar 2015


Chinese share markets were buoyant in February, with the CSI 300 and the MSCI China indices up by 4% and 3.2% respectively in the month. Whilst the two China markets experienced a sell off post the announcement of the 50 basis point reserve requirement ratio (RRR) cut in early February, the correction was only short lived.

The markets quickly resumed their upward trend as disappointing January macro figures invited speculation of more rate cuts. Financials however continued to lead the market, with energy stocks also outperforming following a rebound in oil prices.

The reserve requirement ratio (RRR) was reduced from 20% to 19.5%; the last time there had been an RRR cut was back in 2012. In the Investment Adviser’s view, there is ample room for further RRR cuts (RRR still stands at a very high level by Chinese standards) but also interest rate cuts, as inflation risk is no longer a concern. The January consumer price index (CPI) was only 0.8%, with the Purchasing Managers Index (PMI) dipping below 50 to 49.8 for the first time in two years.

The markets quickly resumed their upward trend as disappointing January macro figures invited speculation of more rate cuts.

The property policy trend in Hong Kong is completely opposite to that in China – whilst the Chinese government has been relaxing policies in the mainland, the Hong Kong authorities have implemented a complete reversal in order to curb rising property prices. Elsewhere, the anti-corruption campaign continues to hurt the Macau gaming industry and Hong Kong retail market. Macau gaming revenue growth in February proved to be a big disappointment with a year on year decline of 49% and apart from the impact of anti-corruption, the strong Renminbi against currencies other than the US dollar has also diverted tourist traffic to other destinations. Many Hong Kong retailers reported negative sales growth during the Chinese New Year. 

The Fund’s return was flattish despite an up market for the month. Portfolio exposure to the environmental sector (8.9%) detracted 1.06% of performance from the Fund, and was the major culprit of underperformance in February. The correction in environmental stocks was triggered by a negative research report on Sound Global and corporate governance concerns regarding Beijing Enterprise Water. As a result of this negative news flow, the Investment Adviser moved to reduce the sector weighting to 2.1%. 

The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 17/03/15 and are based on internal research and modelling.