Lilian Co, portfolio manager of the EI Sturdza Strategic China Panda Fund, provides insight into the Chinese markets.
Chinese equities started 2019 with a bang. The MSCI China Total Return and CSI 300 indices rallied 11.3% and 6.3% respectively through to the end of January. A long overdue rebound materialised as the Chinese government stepped up stimulus measures and positive progress was made on trade talks. The Renminbi gained 2.7% against the US dollar, reversing the depreciation trend of 2018. The US Fed’s benign outlook on interest rates and easing concerns on the trade war both contributed to the strengthening of the currency.
2018 GDP growth slowed to 6.6% from 6.8% the year before, meaning 4th quarter GDP growth was only 6.4%, whilst December’s PMI also dipped below 50 to 49.4, which was lower than expected. Given the weakening macro trend, the Chinese government introduced more countercyclical measures to counter the growth slowdown in early 2019. The People’s Bank of China (PBOC) announced a reserve requirement ratio (RRR) cut of 100 basis point for all banks and the Bank of China issued China’s first perpetual bond with the support of PBOC. This is expected to have a positive impact on other banks seeking new channels to raise capital. The National Development and Reform Commission also indicated a subsidy plan with regards to home appliance and auto industries to boost consumption. In addition, the Chinese government unveiled tax cuts to SMEs which are estimated to potentially save SMEs Rmb200bn a year in tax.
Currently, a significant portion of the money in the Chinese stock market is from retail investors who are less value-oriented. Hence the A share market is price sensitive to non-fundamental factors which can increase volatility in the market. As foreign institutional investors, who are much more sophisticated and value-oriented enter the market, Lilian Co believes it will become more effective and better reflect the fundamentals of the underlying company.
With the continuous effort of the Chinese government to open up the capital market, as well as the huge growth potential of the Chinese economy, implementation of supportive fiscal and monetary policies by the Chinese government and the downward economic pressure seen across developed market, Lilian and her team believe that foreign investors will continue to increase their allocation to Chinese stocks.
Accordingly, Lilian sees this as a great opportunity for long-term value investing in China. Against this backdrop, the team are currently focussing on the following themes within the EI Sturdza Strategic China Panda Fund’s investment portfolio, whilst avoiding high P/E stocks given perceived growth risk:
- Macau gaming – beneficiary of consumption upgrade as Chinese consumers increasingly look for entertainment and leisure spending. The negative effects of the anti-corruption campaign have been fully played out.
- Chinese properties – given cheap valuations with attractive yields. Policy headwind is dissipating as selective policy easing becomes visible in various cities.
- Banks – offering attractive valuations and yields. They trade at below 1x P/B, with a 6% yield, whilst asset quality is improving.
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