Market sentiment regarding China improved during October following the news of a possible trade agreement resurfacing, with the MSCI China Total Return index and CSI 300 index returning 4.0% and 1.9% respectively. Property, property management, technology, auto and healthcare sectors outperformed while telcos and oil majors underperformed. The Renminbi rebounded by 1.5% and closed the month at 7.04 to one USD dollar.
China and the US agreed on the basis for a partial trade accord that could be signed as early as November. China agreed to more than double its annual purchase of American agricultural products to as much as USD50bn while the US suspended the additional 5% import tariff on USD250bn worth of Chinese goods that would otherwise have been implemented in mid October. At the same time, the US government included additional Chinese technology companies on black lists on humanitarian ground.
China’s GDP growth decelerated to 6% in the third quarter, down from 6.2% in the second quarter and 6.4% in the first quarter. This was not surprising given the drag from the year long trade dispute.
Most listed Chinese property developers recorded stronger-than-expected sales in September and October, outperforming the industry. It would appear that they are taking market share from weaker unlisted players. The market has started to appreciate the long term prospect and asset-light model of property management companies. The Team also likes this sub-sector given the high visibility of recurring income, high growth potential of the gross floor area under management and support from parent companies.
The Healthcare sector outperformed in October as the market believed there would be no more announcements regarding centralised procurement policies until the end of the year. The Team believes that centralised procurement policies relating to generic drugs will be the new norm from now on. Industry leaders will be able to offset the shrinking profit from generic drugs with solid contributions from innovative drugs.
The Fund returned 6.7%, outperforming the benchmark by 2.6% during the period under review. The Fund’s exposure to the real estate and Consumer Discretionary (primarily attributable to sportswear and Macau gaming) contributed the most to the outperformance, delivering 2.2% and 3.75% respectively, with sportswear delivering +1.3% and Macau gaming +1.4% during the period. The Investment Adviser topped up the Fund’s exposure to the property sector in October given attractive valuations and yields.
The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 15/11/2019 and are based on internal research and modelling.