Export growth to keep improving as the Renminbi devaluation continues


Fund Commentary
18 Oct 2016


The local bourse remained buoyant with the MSCI China total return index up a further 2.5% in September. The approval from the government allowing Chinese insurance companies to buy HK stocks directly through the Shanghai-HK stock connect program triggered a further market rally as investors bet on further southbound buying.

The announcement by the China Insurance Regulatory Commission (CIRC) to cap the guaranteed interest rate of selective insurance products was also welcomed by the market as it would reduce irrational pricing competition in the industry. Since the southbound buying was concentrated on large cap financials (which alone account for nearly 30% of the index), it was no surprise that the index was lifted as a result. The A share market however was in stark contrast to HK, with the CSI 300 Index down 2.2% in the month. The Investment Adviser suspects that liquidity being diverted to the HK market was the culprit. Sector-wise, insurance, education and internet outperformed while utilities, telecommunication and alternative energy stocks underperformed.

Thanks to the rebound of commodity prices and robust auto and housing sales, industrial profit growth accelerated to 19.5% in August. Other major economic indicators also painted a positive economic trend. Power consumption growth of 8.3% in August was a big improvement from low single digit growth in previous months. Exports, up 5.9% in Renminbi terms, have been on an accelerating trend since the second quarter. The Investment Adviser expects export growth to keep improving as the Renminbi devaluation continues. This is positive for exporters.

Policy risk remains an overhang when investing in policy driven sectors. From early this year, we have seen the government stepping in to take out excessive supply in steel and coal industries due to industry wide losses, and changing its stance on the property sector from loosening to tightening. Last month, the government unexpectedly announced a tariff subsidy cut in wind power, solar and waste to energy sectors as well as a return cut on midstream gas transmission businesses as the return of the operators was considered excessive. The Fund had sold out of a wind power position before the new policy came out. The only position remaining is in the environmental sector but the weighting is small at less than 2%. In the Chinese property space, the Fund began taking profits last month and exited the entire position by early October since the Investment Adviser was uncomfortable with the sizzling hot property market and feared more tightening measures from the government may be on the way.

The Fund rose 2% in the month, 0.26% behind the benchmark. The Investment Adviser believes a large part of the underperformance was due to the substantial underweight in financials and internet. The Fund will not chase financials as the Investment Adviser remains lukewarm on the sector’s fundamentals and thinks the liquidity driven rally has largely run its course given the valuation discount of H share financials to their A share counterparts has pretty much been closed. During the month, exposure to TMT and exporters was increased whilst taking profits on property stocks. The Investment Adviser expects the market to take a pause after a strong third quarter with near term focus shifting towards the rate hike timing and presidential election in the US.


The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 17/10/16 and are based on internal research and modelling.