March macro data beats expectations


Fund Commentary
19 May 2016


In April, Chinese stocks consolidated after a strong March. The MSCI China index was down slightly, returning -0.21% for the month. The much stronger than expected March macro data excited the market initially but profit taking quickly emerged as investors doubted the sustainability of the recovery. Profit taking on high beta stocks such as commodity-related and basic materials names was obvious as the government clamped down on speculation on commodity prices. Property stocks were also sold down on tightened property measures in selective tier 1 cities, while oil stocks jumped further on the recovering oil price.

Almost every line of March macro data was better than expected, thanks to the renewed stimulus measures launched early this year. China’s 1Q GDP growth was 6.7%, slightly ahead of market expectations and well within the government’s target of 6.5-7% in 2016. New bank loans showed a large jump month on month. Within the data, the PMI and export growth were the bright spots. The March PMI came out at 50.2. This was the first reading above 50 since last June, suggesting the economy is back in expansionary mode. Export growth in March was an eye-popping 18.7%, a big reversal from the double digit declines in the first two months of the year. However, the Investment Adviser cautions that one month’s data does not make a trend, especially if one takes the mixed track record of the government into account. Some have argued that the surprisingly strong March macro data was a result of the front-loading of new construction starts and bank lending ahead of the change in tax rate from business tax to value added tax which is coming into effect in the second quarter. The Investment Adviser expects the April macro data to soften as a result.

The Fund was down 0.52% in the month. The Investment Adviser took profits on some winners (such as education, oil and regional insurance plays) after the recent share price rebound. The cash balance was raised to 10.5% as of end of April compared to 5.3% one month ago.

The Investment Adviser has started to build a position in renewable energy plays in expectation of improving fundamentals, and has added exposure to a high end spirit name which has experienced demand recovery year to date. The Investment Adviser also increased the weighting in a leading telecom operator that enjoys a strong free cash flow generation capability with a declining capex trend. Further, the Fund remains underweight in financials, in particular banks, on asset quality concerns.

Now that the economy has shown signs of recovery, the government may refrain from further stimulus as it is conscious of the negative side effects (e.g. further leveraging up at both corporate & local government levels, capacity over-building etc). In the near term, external events such as potential interest rate hikes in the US and the UK referendum on EU membership will pose uncertainties in the stock market. The Investment Adviser will monitor these risks closely. There is also talk about a Shenzhen-HK stock connect announcement by June. The Investment Adviser thinks this will create short term excitement only if it materializes.


The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 16/05/16 and are based on internal research and modelling.