China stocks went from strength to strength


Fund Commentary
20 Sep 2017


Ignoring the ongoing political standoff between the US and North Korea, Chinese equities simply went from strength to strength in August. The MSCI China Index increased 4%, making August the eighth consecutive positive month this year. The last time such a long winning streak occurred was back in 2007, the year of a super bull market.

The July tailwinds, the weak US dollar, improving China macro data and strong corporate results continued to influence markets. Banking stocks finally played catch up due to accelerating earnings growth as reported in the interim results. Technology stocks continued to surge on stronger than expected results and in anticipation of the upcoming iPhone 8 launch in September. Meanwhile, auto and insurance sectors took a breath after a strong run in July.

There were no big surprises with respect to Chinese macro data in July. The manufacturing Purchasing Manager Index (PMI) was slightly better than expected, while export growth softened (probably due to the strong Renminbi). HK Retail sales saw unexpectedly strong growth in July, led by jewelry and luxury items. It seems that the HK retail market is firmly in a recovery mode after having struggled for a few years.

Due to Typhoon Hato, the Macau Government suspended group tours to Macau for 6 days in August. The Investment Adviser however believes any impact on Macau’s gross gaming revenue (GGR) to be short-lived. Despite the typhoon’s impact, Macau’s GGR still surprised on the upside in August.

The Fund returned 5.02% in August, outperforming the benchmark by 106 basis points. Despite a zero weighting in Chinese banks (which outperformed during the month), the team’s exposure in the technology sector alone added around 2% to the NAV. Packaging paper and shipping also contributed positively to the Fund’s performance. The Investment Adviser increased the portfolio’s weighting to Macau gaming, buying into weakness, following the underperformance during the past two months.

Now that the results season is over, the Investment Adviser sees no near term catalysts for the market. The geopolitical risk in North Korea however depicts a threat that may haunt the market from time to time. The team thinks that the market is due for a consolidation given the stellar performance year to date. Overall, the Investment Adviser however stays positive as the market ‘s valuation is still reasonable (MSCI China at 12.8x 2018 P/E) and the macro trend continues to improve.

The views and statements contained herein are those of the LBN Advisers Limited in their capacity as Investment Advisers to the Fund as of 08/09/2017 and are based on internal research and modelling.