BY LILIAN CO
June was an eventful month in which the results of the MSCI review into A share inclusion and the UK referendum surprised investors negatively. China indices were resilient though, with the MSCI China total return index up 1.1 % and the CSI 300 Index down only 0.5%.
Chinese stocks were sold down initially on MSCI’s surprise decision not to include A shares into the China index but they subsequently recovered quickly. The shock created by the unexpected Brexit was also short lived. Yield plays and gold stocks were clear outperformers while companies with significant UK/Europe exposure were beaten down during the month.
There were no major surprises in the May macro data. Major highlights were CPI, which eased to 2% from 2.3% one month ago, and export growth which was up slightly versus a decline the month before. An easing CPI should ease market concerns regarding the government’s inflexibility in adjusting monetary policy. The UK is only a small trading partner to China and hence the direct negative impact of Brexit on China is limited.
The Fund declined 1.05% in the month, underperforming the benchmark by 0.48%. Some of the Fund’s top holdings like Nexteer and SITC were major performance detractors. For Nexteer, the market was concerned about peaking auto sales in North America. As for SITC, the stock was sold down on concerns over weak shipping demand. The Investment Adviser thinks the market has overreacted to the above concerns as business remains robust, as per our recent conversation with the companies. The Fund has around 6% exposure in CK Hutchison and Power Assets which have significant UK exposure. They were down approximately 6% in the month. In terms of trades this month, the Investment Adviser trimmed positions in names that had had a good run (e.g. an exporter, an internet company and a renewable energy play). The Fund increased positions in environmental protection, property and construction sectors as value emerged after the recent market selloff.
The recent flooding in southern China, the worst since 1998, has affected 23 million people. If the flooding continues, the Investment Adviser expects this to negatively impact the economy. Inflation pressures may emerge in the third quarter if food prices surge as a result. Given the downside risk, the possibility of more stimulating policies by the Chinese government to maintain stability cannot be ruled out. Other external events like the bail-out plan for the Italian banks, a possible US rate hike and the US presidential election are uncertainties in the second half of the year. For now, the Investment Adviser sees a range-bound market and any market correction as a buying opportunity.
The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 13/07/16 and are based on internal research and modelling.