During March, all asset classes suffered greatly. While the epidemic was stabilising in China, it was spiralling out of control in Europe and the US. More country lockdowns and tightened travel bans made capital markets nervous.
Investors sold out of both bonds and equities in fear of a great depression. This became a vicious cycle as it triggered redemption pressures which led to even more indiscriminate sell offs across the board.
The oil price dropped 60% from USD50/barrel to nearly USD20/barrel in just one month while the US dollar spiked as a safe haven currency. It definitely felt like a repeat of the 2008 financial crisis except that the speed and depth of correction was more fierce this time.
The MSCI China Total Return Index declined as much as 15.1% before narrowing the loss to only 6.6% in the month, thanks to the unprecedented supportive policies introduced by major central banks such as the UK, US and Japan. Few stocks were immune from the sell off. Travel related (like retail, airline and Macau gaming), technology and some property stocks were hit the hardest.
The US government launched a USD 2 trillion rescue package and announced unlimited quantitative easing. The interest rate was cut to near zero while bond buying was extended to corporate bonds. Similar moves were made by major central banks in other markets.
So far, China has not announced aggressive easing like its counterparts, but this is because it has been ahead of other countries in containing the spread of COVID-19 and reopening the country. Most shops and restaurants have been reopened. Factories have resumed production and consumption is recovering. This is evidenced by the jump of the PMI from 35.7 in February to 52 in March.
The Team believe that the Chinese government will increase stimulus measures should the recovery be dented by external issues.
March was the earnings season for listed companies. Investors shrugged off the 2019 results and focused on post COVID-19 corporate outlook and guidance. Companies from various industries shared similar opinions that businesses were hit worst in February due to the country lockdown but were seeing a swift domestic demand recovery into late March. In the short term, stocks exposed to domestic consumption are likely to outperform exporters as China is recovering faster than overseas markets.
The Strategic China Panda Fund declined 10.1% in March, underperforming the benchmark by 3.5%. The overweight in property, consumer brands, technology and Macau gaming were the major contributors to underperformance.
The Investment Adviser is of the view that the worst is over following the concerted effort by major central banks to stem the economic freefall. The epidemic will fade out. With social distancing in place, it is not a matter of if, but when. Investors should look through a poor second quarter and be positioned for a second half recovery.
The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 16/04/2020 and are based on internal research and modelling.