Following six consecutive months of decline, the Chinese markets took a breather as the government stepped up stimulus measures to support the economy. The MSCI China TR Index climbed 1.2% in May.
The People’s Bank of China’s (PBoC) surprise moves to cut the mortgage rate by 20bps, followed by another 15bps cut to the 5-year loan prime rate, excited the market. Many banks immediately cut mortgage rates to as low as 4.25% for first-time home buyers, down from over 5% one month ago.
We see such actions by the PBoC as symbolic, as this is the first time the central government has taken action in this tightening cycle to save the property market, contrasting to the “lip service” we have previously seen.
Shanghai presented a reopening roadmap after nearly two months of lockdown in the city, as the Omicron outbreak was finally brought under control. Nevertheless, economic data in April was weak, as expected.
Retail sales dropped 11.1% YoY, industrial production was down 2.9% YoY and PMI slipped further to 47.4. Even exports, traditionally the bright spot of the economy, only grew by 1.9% YoY in April (down from 12.9% growth in March).
We believe April should mark the lowest point for the economy in 2022, anticipating a recovery in the second half of the year, as conditions normalise, with more stimulus measures expected.
We may be close to the inflection point after more than a year-long de-rating of the Internet sector. Policy-wise, Premier Li has vowed support for healthy digitalisation developments, while the regulator is reportedly closing the probe into DiDi.
Company-wise, bellwethers like Meituan and Baba have reported better-than-feared first quarter earnings with the beat mostly coming from the better margin on disciplined cost control. We have turned incrementally positive in this sector. Valuations are reasonable and earnings risk seems limited after the sizable reset.
The Strategic China Panda Fund fell 2.1%, with Real Estate exposure, the biggest value detractor for the portfolio, down 1.2% in May. We increased exposure to Internet names by around 3% to 15% and will look to increase exposure to the sector further on any pullbacks.
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.
+44 1481 742380
The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 16/06/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.