Positive shocks

Chinese stocks finally staged a rebound after five consecutive down months. Shanghai re-opened and together with the intensified policy easing, supported market sentiment.

The MSCI China Total Return Index and the CSI 300 rallied by 6.6% and 9.6% respectively in June. Investors shrugged off the greater-than-expected interest rate hike in the US as China is in the opposite interest rate cycle, with the government implementing rate cuts on the back of tame inflation.

Sector-wise, Property, Internet, Electric Vehicles and Biotech outperformed, while Banks underperformed. June macro data showed a meaningful recovery from April and May following the lifting of the Shanghai lockdown. The Chinese PMI recovered to 50.2, above the expansion threshold of 50, as economic activities normalised.

Retail sales jumped 3.1% YoY in June after three consecutive negative months. The CPI remained under control at 2.5%, a big contrast to the runaway inflation in the western world. This should give the Chinese government more leeway for monetary easing.

June property sales recovered strongly. On a YoY basis, it was still down, but the decline narrowed from the month before.

All eyes were on this year’s “18 June online shopping festival” following the prolonged COVID outbreak. Total gross merchandise value was up, with JD and Alibaba recording +10% and positive single-digit growth respectively, in-line with market expectations.

The government also vowed to boost car consumption as it considered extending tax exemptions on electric vehicle purchases and stimulating the used-vehicle market.

China has become more flexible in tackling the “zero COVID” policy. The recent relaxation of China’s travel policy was a positive surprise to the market. China has shortened the quarantine time for international travellers from 21 days to 10.

This is the first step towards reintegration with the world. We believe vigorous COVID testing will continue throughout the country, but city lockdowns are unlikely given the painful price paid in the recent Shanghai incident.

The Strategic China Panda Fund gained 4.2% in June. The underweight in the Internet sector and overweight in the Shipping sector were the biggest value detractors.

The Fund sold out of SITC, taking profit now that the shipping upcycle has played out. We remain eager to increase the weighting in the Internet sector if any pullback presents an opportunity.

As always, we invite investors and prospective investors, to contact us should they wish to understand our views on the current situation and the positions held in the portfolio. Please do not hesitate to contact us for further information.

Adam Turberville
Director
+44 1481 742380
a.turberville@ericsturdza.com

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The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 18/07/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.