Bullish sentiment in Chinese markets

The existing bullish sentiment extended into December. Positive vaccine news continued to excite investors despite the resurgence of COVID-19 cases globally and the escalating pressure from the US on China. The MSCI China Total Return Index and the CSI300 finished the last month of the year with gains of 2.8% and 5.1% respectively.

Monthly Fund Commentary
21 Jan 2021

The existing bullish sentiment extended into December. Positive vaccine news continued to excite investors despite the resurgence of COVID-19 cases globally and the escalating pressure from the US on China. The MSCI China Total Return Index and the CSI300 finished the last month of the year with gains of 2.8% and 5.1% respectively.

Despite a short-term shock in the first quarter, COVID-19 turned out to be beneficial to stock markets, as it has led to unprecedented quantitative easing and fiscal stimulus across the major economies.

The MSCI China Total Return Index and CSI300 ended the year up 29.5% and 27.2% respectively. This was the second consecutive year of positive returns for China markets. During December, Auto, Property Management, Technology, Healthcare and Consumption outperformed while Internet, Property and Banks underperformed.

Pressure from the US on China continued to intensify in Donald Trump’s remaining days as the US President. Following an executive order from the Trump administration, the FTSE and the MSCI announced the removal of a number of Chinese companies from their indices under a US sanction in association with the Chinese military. The US will add another 80 companies, including SMIC, to the blacklist of companies that will be denied access to US technology.

The Politburo meeting in December set the tone for economic targets in 2021. It emphasised both supply and demand reforms to support the “dual circulation” development model and called for the strengthening of anti-monopoly efforts.

The hawkish tone on the Real Estate sector was removed (which is positive to the sector). It mentioned that counter-cyclical policy fine-tuning would moderate as the economy normalises post-COVID-19. This suggests that the supportive policies introduced in 2020 would be phased out gradually. We see this as a potential risk to the equity markets in 2021.

The Internet sector sold off again following the news that Alibaba is being investigated by the Chinese authority for violating anti-trust laws. We remain positive though. Regulatory oversight is not new in China. Online Gaming and Education sectors went through regulatory scrutiny a few years ago, the industries suffered initially, but the market leaders gained market share and emerged stronger in the end. We do not believe that it will be any different for Alibaba. That said, Alibaba is likely to be dead money until the investigation is over.

The Healthcare sector, especially biotech names, rebounded on milder than expected price cuts on the new drugs added to the National Reimbursement Drug List (NRDL). All domestic PD-1 products were added to the list while products from MNCs were excluded due to uncompetitive pricing. Handset component stocks also had a good run as the market began to anticipate the recovery of smartphone shipments in 2021.

The Strategic China Panda Fund climbed 4.8%, outperforming the benchmark by 2.1% in December. The overweight in Consumer Durable (mainly retail brands), Technology Hardware and Pharmaceutical sectors were the largest contributors to outperformance. The relative underweight in Alibaba, which was affected by the above mentioned anti-trust investigation, also added value. In terms of stock movements, Banks were added to the portfolio, in addition to Internet stocks, with Macau Gaming and Auto exposure also increasing.

The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 13/01/2021 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.