China’s rising GDP

January saw a rough start to the year for Chinese equities, with the MSCI China Total Return Index and the CSI300 down 3.0% and 7.6% respectively, following a challenging 2021.

Fund Commentary
16 Feb 2022

January saw a rough start to the year for Chinese equities, with the MSCI China Total Return Index and the CSI300 down 3.0% and 7.6% respectively, following a challenging 2021.

Interest rate hike woes in the US and renewed liquidity crunch concerns surrounding Property Developers unnerved the market. The US 10-year bond yield surged to 1.78%, a two-year high after brokers raised the number of rate hikes in the US beyond four over inflation fears.

Technology and high P/E stocks, the most sensitive to interest rate hikes, were sold down as a knee-jerk reaction. Sector-wise, Internet, Biotech and Property were the clear underperformers, while Telecommunications, Banks and Energy recorded positive gains amidst the down market.

GDP growth rebounded strongly: 8.1% in 2021 from 2.3% in 2020, albeit slowing from 18.3% in the first quarter to a mere 4% in the fourth quarter. We expect the deflating trend to remain on the back of a COVID resurgence, and the reduction in private investment following the regulatory clampdown last year.

We are, however, hopeful for an improvement moving into the second half of 2022, now that the government has reversed its policy from tightening to loosening. After the reserve requirement ratio was cut last December, the People’s Bank of China also cut the loan prime rate in January. We expect more monetary and fiscal stimulus to support the economy.

Although the government has begun to relax the Property tightening, the benefits have yet to be transmitted to the Property developers. The news that the government is drafting rules to give developers easier access to pre-sale funds held in escrow accounts with banks, only briefly excited the market.

The market was spooked by the resignation of PwC as the auditor of Hopson Development, and the share placement/CB issuance by a few seemingly strong developers, despite depressed share prices. The genuine financial health of developers was called into question. There was a clear divergence of share price performance between the first-tier developers and the second-tier players; with the former recording positive share price gains and the latter suffering a significant correction.

The Strategic China Panda Fund gained 1.4% amidst a down market. The outperformance was attributed to the underweight in Internet and overweight in Property. The Fund’s strategic decision to focus on quality Property Developers paid off.

As always, we invite investors and prospective investors, to contact us should they wish to understand our views on the current situation and the positions held in the portfolio. Please do not hesitate to contact us for further information.

Adam TurbervilleAdam Turberville
Director
+44 1481 742380
a.turberville@ericsturdza.com

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The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 14/02/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.