In August, Chinese shares plunged following President Trump’s unexpected announcement to increase tariffs. The inversion of the Treasury yield curve and the resulting market fears over a US recession added to the sell-off.
During the month, the MSCI China Index fell 4.2%, while the CSI 300 Index dropped 0.9%, with the Investment Adviser believing that the underperformance versus the CSI 300 Index was due to Honk Kong’s market being depressed against the backdrop of escalating social unrest. Utilities, healthcare, sportswear and liquor outperformed in August, while HK-centric sectors like property, retail and Macau gaming underperformed.
At the beginning of August, Donald Trump unexpectedly announced a 10% import tariff on the remaining USD 300bn worth of Chinese imports, which are to be levied in two tranches. During the month, the US also labelled China as a currency manipulator for the first time since 1994. In return, China raised existing tariffs on US$75 billion worth of US goods of between 5% and 10%. The Chinese government also let the Renminbi weaken past the level of 7 against the US Dollar, ending the month at 7.16. With a nearly 4% currency depreciation in one month, part of the pressure resulting from the tariff increase was therefore offset.
Both sportswear and high-end liquor companies continued to deliver robust earnings growth with positive guidance in the interim results season. According to the Investment Adviser, it was proven again that domestic consumption has fared quite well despite a macro slowdown. This said and following the protracted protests, Hong Kong’s property and retail sales sectors were under pressure against declining retail sales and tourist arrivals. Gross gaming revenue in Macau fell, worse than expected, declining nearly 9% in August.
According to the team, markets anticipate a policy relaxation in the healthcare sector. Many pharmaceutical companies expect the upcoming centralised procurement act to lead to multiple winners gaining a larger market share in contrast to a single winner previously, thereby decreasing pricing pressure. The Investment Adviser believes the worst of the policy risk should have been priced in.
The Fund lost 8.2% in August, with the biggest drag on performance being the overweight in Chinese properties and HK-centric players like Macau gaming and retailing. The Investment Adviser starts to see value emerging again on cheap valuations and attractive yields across the board. During the month, the portfolio’s exposure to health care was increased.
The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 14/08/2019 and are based on internal research and modeling.