BY LILIAN CO
Chinese stocks finally staged a rebound in October, thanks to a stabilising macro trend and a delayed rate hike decision by the US Federal Reserve. The MSCI China Total Return Index rallied 9.1% in October, the first gain after five straight months of declines. The rally was driven by a combination of a short squeeze and bargain hunting by investors on oversold stocks. Sectors like Macau gaming, oil, gas and US ADRs saw the biggest rebound. The relief rally of US ADRs was notably led by the better than expected quarterly results reported by bellwether names such as Alibaba, Baidu and EDU.
The macro trend is stabilising. Chinese GDP growth in the third quarter was 6.9%, only slightly down from the 7% growth figure reported in the second quarter. Leading economic indicators such as the PMI even ticked up slightly in September whilst export declines narrowed from -6.1% in August to -1.1% in September. Property and auto sales momentum continued to improve into September and October. The Renminbi has also stabilised and even showed a slight appreciation after the unexpected 3% drop in August, bucking the consensus view for further devaluation. Fears of a hard landing in the Chinese economy now seem unwarranted.
The Fifth Plenum of the eighteenth Congress was concluded with no major surprises. The only surprise was the relaxation of the “one child policy” to a “two child policy” right after the meeting. The Investment Adviser believes this will be a long term positive for domestic consumption, but sees no immediate implications for stocks as companies in general are still struggling with near term macro headwinds. Additionally, there is talk about further tariff cuts across IPPs, wind and solar farms to alleviate cost pressures on industrial users in the face of a downward economic adjustment. Share prices of IPPs, wind and solar players subsequently sold off.
The Fund was up 9.5% in October, slightly outperforming the underlying benchmark. The decision to add risk in September paid off. The largest return contributors were auto (+1.4%), insurance (+1.8%) and internet sectors (+3.3%). The cash level was raised to 5% by the end of October. Now that The Investment Adviser’s thesis is being played out, they are happy to keep taking profits on further market gains.
The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 09/11/15 and are based on internal research and modelling.