It’s retail season in China

Following a short rebound in October, the Chinese stock market resumed its downward trend in November. The MSCI China TR Index returned -6.0% while the CSI300 declined 1.6%.

Fund Commentary
20 Dec 2021

Following a short rebound in October, the Chinese stock market resumed its downward trend in November. The MSCI China TR Index returned -6.0% while the CSI300 declined 1.6%.

A market sell-off was triggered on the back of disappointing Q3 earnings reports from Internet bellwethers; mounting default risks in the Property sector and a global wave of the new COVID variant – Omicron. New Energy Vehicles, Auto Parts and Food & Beverage sectors outperformed, whilst Internet and Property related stocks underperformed the market.

Macro data in October pointed to a weakening domestic growth trend. PMI and retail sales were weak, while inflation, (particularly PPI) continued to rise. Export growth was the only bright point, up 20.3% YoY.

China has been gaining market share in global exports due to stable domestic production, despite acute global supply chain disruption. Domestically, surging raw material costs are gradually being transmitted to consumers through price hikes – some food and beverage companies selling noodles and dairy products have recently announced price increases.

Internet companies reported worse than expected Q3 results with lacklustre guidance. Alibaba disappointed the market by reporting a small 3% growth in customer management revenue (a core e-commerce business in China), indicating a loss of market share to JD and PDD. Tencent also narrowly missed market expectations due to the suspension of a new game approval and advertising slowdown.

Unlike Alibaba, Tencent did not lose its leadership in the Gaming sector, nor in the social networking segments. Other Internet companies also reported a slowdown of growth on the back of industry regulation and macro slowdown. On the contrary, Sportswear companies reported robust online activity, aided by the Double 11 shopping festival.

Nationwide Property sales continued to fall in November, declining 30% YoY (a drop of 7% MoM) due to the prolonged wait-and-see attitude adopted by home buyers. As fast as the physical market is cooling down, the government is becoming more dovish towards this sector.

The regulators have given the green light to allow quality developers to issue bonds in the interbank market. There were also market talks about excluding M&A related debt from the “three red lines” calculation. We expect more positive news on property easing down the line.

The Strategic China Panda Fund outperformed the benchmark by 1.7% in November, returning -4.3%. The underweight to Internet and overweight in Sportswear and Shipping were the greatest contributors to the outperformance. We expect volatile trading to remain in the near term, as investors await clarity in policy direction.

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

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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 16/12/2021 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.