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deBY LILIAN CO
Chinese equities staged a strong recovery in March, thanks to renewed stimulus measures from the Chinese government and a sharp rebound in the oil price. A strong Renminbi (up 1.5% in the month) also served as a positive tailwind for the stock market. High beta cyclicals such as commodity and basic material related stocks were clear outperformers in the month as investors bet on rising demand for commodities on the back of further stimulus.
The stimulus (accelerated infrastructure spending and loosening property policies) launched by the government is likely to boost the economy in the short term. This can be evidenced from the better than expected March PMI at 50.2 (the highest level since last June) and a pick up in property investment growth. Whether the recovery can be sustained remains to be tested as China is still going through a structural adjustment. New policies continue to roll out. A debt to equity swap scheme for banks was announced last month. The idea is to reduce the non-performing loans (NPL) ratio of banks and relieve highly geared corporates from a liquidity crunch. However, the Investment Adviser does not believe such a scheme is addressing the fundamental issues in the economy. Banks are clearly serving the national interest by taking on bad debt as an equity investment. On the property front, soaring property prices in selective tier 1 and 2 cities have put the government on high alert. The Investment Adviser has started to see tightening measures reintroduced in cities with overheating property markets although the supportive measures in other cities are still intact. The expectation therefore is for mixed share performance of property developers in near term.
The Fund was up 7.8% in March, underperforming the underlying benchmark by 4.1% during the month. The high cash level (25% at the end of February) and defensive portfolio positioning underperformed the rising market. The Investment Adviser has started to put some money to work after the stabilization of the market, and the cash level was cut to around 5% of the portfolio as at the end of March. Stock selection has been focused on yield plays and names with overseas business or high earnings growth visibility, but these stocks underperformed last month. The Investment Adviser has not chased high beta cyclical stocks due to being uncertain of the sustainability of the economic recovery in this round of stimulus (especially since the track record of stimulus in the last few years has been poor). The Investment Adviser will wait until further signals confirming the sustainability of the recovery trend before turning more aggressive.
Externally, the timing of interest rate hikes in the US, or any undesirable effects from the negative interest rate policy pursued by the central banks of Japan and Europe is likely to create further volatility in the market. However, now that the market has rallied, the Investment Adviser sees better entry points for buying equities in the second quarter.
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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 12/04/16 and are based on internal research and modelling.