October was another up month: Chinese equities simply went from strength to strength. The MSCI China Index and the CSI 300 index jumped 4% and 4.4% respectively. Better than expected Q3 results released by banks, the development of insurance stocks and the unexpected announcement regarding the cut of the Reserve Requirement Rate (RRR) triggered a strong run in financials and hence pushed the index upwards. Conversely, sectors that rallied the previous month gave back some of the performance.
This included property, education and Macau gaming. Throughout the Golden Week, a 7-day national holiday, retail sales were good, both in HK and China. Macau gaming revenue was better than expected despite the typhoon’s impact, while property sales in China were subject to negative growth (the first time since March 2015) after months of tightening measures. The Purchasing Manager Index (PMI) increased from 51.7% in August to 52.4% in September, depicting a pleasant surprise for the market.
The Fund returned 1% during the month, underperforming the benchmark by 3%. A large part of the Fund’s underperformance was due to the portfolio’s underweight exposure to banks and zero allocation in the insurance space, industries which constitute over 20% of the index and rallied in October. Since the Fund is not benchmark focused, it tends to underperform when index stocks spike. The 19th Party Congress was concluded without a surprise in leadership change. President Xi is now in full control of the communist party. The Investment Adviser believes that the government will now focus on the economic agenda, including the SOE, as well as supply-side reform and financial deleveraging. After the election, the market focus shifted to the state visit paid by President Trump in early November to see how China can “deal” with President Trump.
In summary, the Investment Adviser is confident with regard to China’s economic growth outlook and does not expect stumbling blocks to derail this trend.
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.