In August, China stocks remained under pressure as the ongoing Sino-US trade frictions, the contagion of the emerging market crisis and domestic macro concerns kept haunting the market, triggering the MSCI China Index and CSI 300 Index to lose 3.8% and 5.2% respectively.
Investors went “risk off” again after 1) Donald Trump unexpectedly raised the proposed tariffs on US$200bn worth of Chinese goods from 10% to 25% and 2) following the plunge of the Turkish Lira (-33%). High P/E stocks from sectors such as education, internet, technology hardware, pharmaceuticals and Macau gaming were sold heavily, while utility and energy stocks outperformed. According to the Investment Adviser, basically all winning sectors from 2017 have turned into underperformers year to date.
In July, China macro data was soft, with retail sales, industrial production and fixed assets investment growth slightly behind market expectations. Despite many companies having reported stronger than expected first half year results with a sanguine outlook, stocks were sold. In the team’s opinion, macro concerns influenced investors more than company-specific fundamentals.
The Renminbi (CNY) stabilised slightly in August, having declined only 0.2% during the month. The currency depreciated by as much as 1.7%, down to 6.9348 intra-month and near the psychological barrier of 7, before the government intervened and slowed the depreciation. Due to the intervention of the “invisible hand” of the Chinese government, the team expect the Renminbi to hit the trough in the near term.
High-flying sectors such as education and online gaming were under government scrutiny during the month. In early August, the government released a draft amendment on the implementation rules for promoting private education. Key points included restrictions regarding the acquisition of non-profit schools by profit schools and imposing greater government oversight on operations and finances of non-profit schools. More stringent guidelines on after school tutoring were also announced, with education stocks recording heavy losses following these announcements. As for online gaming, Chinese authorities have stopped approving new game licenses since the end of March and proposed to limit the number of new online games and the time spent on games by children. Companies exposed to online gaming like Tencent and Netease have been sold subsequently.
During the month, fundamentals associated with the Chinese property sector remained solid. Contract sales grew by 30% YoY in July, with many companies having reported satisfactory 2018 interim results and a strong beat on earnings. Despite a tightening property policy, nearly all companies maintained their 2018 contract sales guidance, with the team believing that concerns regarding this sector are exaggerated. The current sector valuation is attractive at 6.9x 2018 and 5.5x 2019 P/E, with attractive yields of over 5%.
The Fund lost 3.8%* during the month, in line with the benchmark. The team sold its exposure to the education sector prior to the announcement of the aforementioned guideline and at the same time reduced the weighting in Tencent further following the new regulations.
The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 18/09/18 and are based on internal research and modelling.