In her latest webinar to investors, portfolio manager Lilian Co, discusses China’s journey towards sustained economic growth and the opportunities within the countries increasingly dynamic ‘new economy’. Despite economic growth pains induced by overleveraging of China’s financial system in recent years, Lilian believes China is now on the road to real recovery following strong domestic stock performance in 2017.
The EI Sturdza Strategic China Panda Fund has returned more than 56% to investors in 2017 alone (as at 30 September), highlighting improving company fundamentals within the domestic Chinese equity markets.
Lilian attributes the emergence of China’s ‘new economy’ – a label referring to the IT, healthcare and education sectors – to the 2013 administration which anchored its economic agenda on market reform, focusing on issues such as corruption.
An agenda focused on anti-corruption campaigns is core to cementing China as a sustainable growth economy, according to the portfolio manager. While the initiatives appeared to paying dividends, with 90% of the anti-corruption campaigns now complete, the period of adjustment meant equity market performance proved temporarily disappointing.
During the webinar, Lilian also highlighted the spending behaviours of corporates. This has become an important driver of economic change as corporates become more disciplined in capital spending and ensuring adherence to expense caps. Additionally, supply side reform initiated by the government along with fewer vigorous price cuts, has led to a remarkable increase in profitability in upstream industries.
Discussing the recent growth in the MSCI China Index and strong rally in Chinese equities, Lilian says the fund’s strong growth in the last year comes as corporates deliver better results, leading to the re-rating of Chinese companies, a trend that is expected to continue into next year.
Regardless of the strong market rally year to date, the portfolio manager does not believe valuations are reaching unreasonable levels. By contrast, Lilian commented that when taking a 5 year view or when comparing to other regional markets, Chinese equities are currently trading at relatively low multiples and as such she perceives further upside potential from current levels and for the re-rating of Chinese corporates.
Portfolio performance and investment focus
In wrapping up, Lilian turned to the fund’s investment strategy, which seeks growth stocks with high earnings growth visibility. The largest focus for the fund has been on the TMT, education and consumer retail industries. A commitment to growth stocks in these market sectors has underpinned the fund’s outperformance during the last year. A strong weighting in education and technology stocks which have performed extremely well has counter-balanced the decision to avoid positions in banking, given the sectors underperformance in the last year.