The market has continued to consolidate, with attention shifting to the potential US tapering as their economy begins to normalise. A resurgence of new COVID-19 cases in regions such as India and Taiwan have also curbed risk appetite.
The MSCI China Total Return Index was directionless in May, ending the month slightly up at 0.8%. The Renminbi to USD strength continued, peaking at 6.37 before returning to the level seen just before the start of the US-China trade war back in June 2018. The strong economic recovery from the COVID-19 pandemic in China and a weak USD were the major drivers behind this.
Soaring YTD commodity prices caught market attention on inflation risk and possible earlier than expected US tapering. A recent reading of the US CPI shows the US has already exceeded the Fed’s long-term target of 2%. Industry-wise, Sportswear and Biotech were clear outperformers while Internet, Property and Macau Gaming underperformed the market.
The Q1 results of Internet companies were reported during the month and the general trend saw increased investment from the industry leaders. This was particularly the case for e-commerce players as they forayed into community group purchases. Incumbents, like Tencent and Alibaba, even guided down their full-year profit growth forecast.
It seems the market has digested most of the uncertainty brought on by the antitrust crackdown as Internet stocks have now moved into a trading range from the earlier sell-off. We believe this sector is near the end of the regulatory cycle.
Property stocks were under pressure again, as land prices continued to soar in recent centralised land auctions across several cities. This was disappointing to the market’s expectation of lower land prices under the new land sale mechanism. Concern over further margin and cash flow pressures also weighed on the sector.
In addition, high yield property bond prices suffered in the wake of a liquidity crunch affecting a few Chinese companies including China Huarong Asset Management, Sichuan Languang Development and Huaxia Fortune Land. We are mindful of sector liquidity risk and only invest in Property stocks with strong balance sheets.
The Strategic China Panda Fund was up 1.2% in May, bringing the YTD outperformance to 5.8% against the MSCI China NR USD. Sportswear and Biotech exposure contributed the most to the gain, adding 1.3% and 0.6% to the portfolio, respectively. The strong performance was partially offset by the drag in Media exposure which was down 0.9%. We trimmed stock weightings in Biotech and Property Management Services on the back of share price strength.
As always, we invite investors and prospective investors, to get in touch if you would like to discuss the positions held in the portfolio or require further information.
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The views and statements contained herein, including those pertaining to contribution analysis, are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 15/06/2021 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.