Regulations, stimulus and sanctions

We have seen a continuous flow of news surrounding the Property and Internet sectors recently, unfortunately, not much of it is positive which continues to weigh on the stock market. Even the increasingly dovish government tone towards the Property sector failed to calm investors.

Fund Commentary
19 Jan 2022

We have seen a continuous flow of news surrounding the Property and Internet sectors recently, unfortunately, not much of it is positive which continues to weigh on the stock market. Even the increasingly dovish government tone towards the Property sector failed to calm investors.

The spread of Omicron cases across multiple cities in China further exacerbated market pessimism. The MSCI China Total Return Index declined by 3.2% in December, to finish 2021 down 21.7%. The Banking and Home Appliance sectors outperformed the market, while the Biotech, Internet and Auto sectors underperformed.

Macro data for November was mixed with the PMI slightly above 50, the expansion threshold, while retail sales growth weakened again. We expect retail sales growth to slow further in the coming months as we see more cities lock down against a COVID resurgence. As long as the government remains strict on its “zero tolerance of COVID cases” policy ahead of the Winter Olympics, the prevailing pandemic will continue to be a drag on the economy.

Against this backdrop, the Politburo economy meeting that concluded in early December, called for maintaining economic growth, and sent a supportive message to the Housing sector. Shortly after the meeting, the call was followed by a 50bp reserve requirement rate (RRR) cut by the PBOC, the second of the year. The government has clearly shifted its priority from regulatory tightening to stabilising growth. We expect more monetary and fiscal stimulus, coupled with an easing of Property policy to come.

Internet stocks, particularly American Depositary Receipt (ADRs), declined following a series of negative news reports. Didi announced its delisting plan, in addition to news that the government was in talks with Didi to take a “golden share” in the company. This sent negative waves across the sector.

The biggest shock to the market was the surprise announcement by Tencent to distribute its investment in JD.com as a dividend to its shareholders. This raised concerns as to whether Tencent would sell down its other investments, such as Meituan or Pinduoduo. Tencent’s move is seen as a gesture to appease the government, which is uneasy regarding the company’s dominance of the Internet industry.

Externally, the US government has imposed sanctions on a few Chinese biotech and surveillance companies for their exposure to the Xinjiang province. SenseTime, the largest Chinese AI company, was forced to delay their Hong Kong IPO as it was added to the sanction list.

The Property sector has again been under mounting selling pressure. Reports that Shimao Group was in trouble caused equity and bond prices to drop across the sector. Another negative surprise was the share placement by Sunac China and Logan.

The Property Developer sell-off spread to Property Management Service names, as investors began to worry about the financial health of the latter’s parents, especially after Shimao Services announced an asset purchase from its parent. Investors saw this move by Shimao Services as a way to bail out its parent, calling the company’s corporate governance into question.

The Strategic China Panda Fund returned -3.2% in December – in line with the benchmark, and outperforming it by 4.1% over the year. With market P/E trading in the low teens, a lot of the negatives have been priced in. After a year of regulatory tightening, the government is likely to refocus on boosting growth in 2022. We are hopeful of a market re-rating in the coming year.

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

_

The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 17/01/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.