Corporates are reaping benefits from supply side reform


Fund Commentary
26 Jan 2018


December was yet another positive month for the Chinese market, with the MSCI China Index returning 1.9%. The market started the month with a long overdue correction as investors locked in profit before year end. Similar to previous months, the correction however proved to be short-lived as “bottom fishing” set in quickly.

The index closed the year with a hefty 54.1% gain, finally surpassing its previous peak in 2007. 2017 marked a year during which the index broke its 7-year trading range for the first time since the last bull market in 2009.

During the month, sectors such as energy, properties and Macau gaming outperformed, while the technology sector clearly underperformed. In particular, technology stocks were sold off following disappointing growth of the Chinese handset market and analyst downgrading of the technology sector. On the other hand, revenue growth of Macau gaming was a positive surprise in December. An improving macro-economic environment in China and the return of VIP players were the drivers behind this recovery.

Throughout the month, the US Federal Reserve raised the benchmark interest rate by 25 basis points for the third time in 2017. The market’s reaction was however muted as this move had been widely expected. Generally, Chinese macro data was in line with market expectations.

In December, the Fund was up 1.5%, underperforming the benchmark by 0.4%. The Investment Adviser attributes this underperformance mainly to the Fund’s technology exposure, which was hit badly during the month. On a full year basis however, the Fund has delivered strong absolute and relative performance of 63% and 9% respectively. The portfolio’s active positioning and stock selection both contributed positively.

The team took advantage of the market correction in early December to increase exposure to Chinese banks, whilst the Fund’s exposure to Chinese properties and Macau gaming was also increased. Due to rich valuations, the allocation to the education sector was however decreased.

President Xi has officially consolidated his power following the re-appointment of the Politburo Standing Committee members in the 19th Party Congress. As such, the Investment Adviser expects the government’s focus to shift from politics to economics as evidenced by President Xi’s reiterated priority on supply-side reform and financial deleveraging. Anti-corruption appears to no longer be the focus. According to the Investment Adviser, the emphasis on economics will be conducive to the Chinese economy.

The team thinks that 2017 only marked the beginning of a multi-year up cycle after years of economic adjustments in China as corporates across industries finally reap benefits from the supply-side reform (implemented since 2016).

The views and statements contained herein are those of the LBN Advisers Limited in their capacity as Investment Advisers to the Fund as of 16/01/18 and are based on internal research and modelling.