Stability following turmoil

Following the market turmoil of July, China stocks traded in a tight range during August. The MSCI China Total Return Index was up slightly last month, by 0.2%. Even though Nancy Pelosi, the speaker of The US House of Representatives, triggered cross-strait tensions during her visit to Taiwan, the stock market reaction was muted.

There were also positive developments surrounding potential ADR de-listings. The US and China signed an initial agreement to allow PCAOB, from the US, access to audit the papers of Chinese ADRs, which is a big step forward for China. Sector-wise, Internet outperformed whilst Property, Banks, Auto and Macau Gaming underperformed.

China’s July macro data showed that growth was slowing down once again. The boycott of mortgage payments and wide-spreading COVID cases across the country were the main causes. The PMI dipped below 50 – the expansion threshold – to 49, following an improvement in June.

Retail sales growth was also well below expectations at 2.7%, compared to 3.1% in June. On the back of this, the PBOC lowered the rate of one-year medium-term lending facility loans by 10 basis points to 2.75%. The market was, however, wary of the piecemeal easing approach adopted by the government.

Their Q2 results confirmed the Internet earnings recovery trend. Strong earnings beats, combined with disciplined cost control was the general theme. In July, the GMV improved on June’s figure, led by E-commerce companies. Tencent also identified a potentially significant source of income, placing adverts in their new video accounts.

Sportswear companies reported in-line results and the top-line performance of domestic brands remained resilient, despite the impact of COVID. Consumer Staples companies reported mixed results as product price hikes partially offset the margin pressures caused by rising raw material costs. The stricter COVID restrictions implemented in Q2 affected the overall consumption environment.

The Strategic China Panda Fund returned -2.3% in August. The underweight in Internet and overweight in Sportswear were the main value detractors, but we believe we are well positioned and remain patient for a recovery.

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 19/09/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.