Market sentiment remained buoyant in August despite the rising Sino-US tensions, with the MSCI China Total Return Index up a further 5.7%. Technology Hardware, Marine, Luxury Goods and Macau Gaming sectors outperformed the market, whilst Property stocks and Electronic Manufacturing underperformed during the month.
Citing national security reasons, US President Donald Trump signed an executive order to ban the use of Tiktok and Wechat in the US, these two Chinese apps are owned by Bytedance and Tencent respectively. Although the US was only a small market to Tencent, accounting for less than 2% of its total revenue, the news still had a negative impact on the share price.
The US also dealt a second blow to Huawei, ruling that foreign semiconductor companies could not sell products that contain US technology to Huawei unless they obtain a license from the US government in advance. Stocks in Huawei’s supply chain sold off, while the share price of Xiaomi (Huawei’s competitor) soared on the potential increase of market share.
President Xi advocated for a “dual circulation” economy model to withstand the uncertain external environment (particularly from the US). The essence is to make the domestic economy the core growth driver and external markets the supplemental driver. This suggests to us that more supportive measures are on the cards to boost domestic consumption.
As the results season concluded, Home Economy stocks such as Internet Companies (particularly those related to online gaming, food delivery and e-commerce), and small electronic appliance producers in general, exceeded the market consensus and gave positive guidance. Handset component stocks reported better than expected results, guiding down the forecast on the Huawei hiccup. The results of property management companies were divided as companies with State Owned Enterprise (SOE) backgrounds disappointed while private companies significantly outperformed market expectations on the back of strong support from parent companies.
The growth in national property sales throughout July was another positive surprise, but this did not prevent property stocks from selling off. There was news that the government was drafting new rules to cap developers debt growth in order to curb the overheated land market.
We believe that the new rules, if implemented, will accelerate market consolidation and ensure a long-term healthy development of the industry. We have chosen to avoid investing in highly geared companies as we believe they are the most likely to be impacted as a result of such measures.
The Strategic China Panda Fund gained 8.2% during August, outperforming the benchmark by 2.5%. Sector wise, Retail was the biggest contributor to return adding 3.1% to the portfolio. Internet and Property Management stocks were the next largest contributors, and exposure to both these sectors was increased throughout the month.
The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 15/09/2020 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.