Improvement in Sino – US relations


Fund Commentary
18 May 2017


The performance of China stocks in the A share market and the HK market diverged in April. The MSCI China total return index continued to trend up 2.7% whereas the CSI 300 index lost 0.5%. Financial deleveraging and tighter regulation, which was triggered by President Xi’s speech to control risk in the financial markets, drove up the 10-year China bond yield and led to a sell-off in the domestic A share market. The HK market was, however, left unscathed this time.

It turned out this policy risk in the A share market was a blessing in disguise for HK, as fears of liquidity tightening in China prompted even more southbound flows to HK, which is considered a safe haven. The risk on mood post the first round of the French presidential election and strong US technology stock performance fuelled further buying of HK stocks especially in the TMT space. Investors even shrugged off geopolitical risks in North Korea and Syria. Sector wise, internet, technology, exporters and education stocks continued their strong run, while commodity related sectors such as oil, coal and steel sold off on tightening concerns.

China’s GDP growth in the first quarter was 6.9%, higher than expected. The Investment Adviser thinks growth may have peaked this year as policy tightening and financial deleveraging curb growth in the coming quarters. We have already seen the growth of property and auto sales (both major drivers of economic growth) falling recently. Having said that, the Investment Adviser sees no risk of a liquidity crunch or a hard landing as the government has repeatedly shown the market its ability to keep the economy growing in a tight range in each tightening cycle.

There was a big improvement in Sino US relations after the summit between the leaders of the two nations. China was not listed as a currency manipulator, nor was there a punitive import tariff announced on Chinese goods. Shares of exporters regained most of their lost ground from earlier this year.

The Fund gained 4.55% in April, outperforming the benchmark by 1.89%. Again, the overweight in tech and education and the underweight in commodities contributed to the outperformance. After a strong run year to date, the cash level of the Fund has been raised to over 5%. The Investment Adviser will be looking to buy into any weakness should there be a correction in the market.


The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 15/05/17 and are based on internal research and modelling.