Strong first quarter for Chinese equities


Fund Commentary
21 Apr 2017


China stocks were up for the third consecutive month. The MSCI China index climbed another 2.1% in March, finishing the first quarter with a return of 12.9%.

Southbound buying remained a key supporting factor. The People’s Bank of China (PBOC) raised interbank interest rates again by 10 basis points to rein in excess liquidity, this was the third rate hike this year. Chinese financials reacted positively initially but gave up most of their gains by the end of the month. The National People’s Congress meetings concluded in March with no major surprises whilst the government reiterated its commitment to stateowned enterprise (SOE) reform, inventory destocking in the property market and supplyside reform. Sector wise, technology, internet and education stocks outperformed with exporters also staging a strong comeback as investors became less concerned about a potential trade war between China and the US.

Macro data released in the month points to a stabilizing economy. The February purchasing manager index (PMI), a leading indicator of the economy, showed further expansion from the January level. Inflation also seemed to be in check – although the producer price index (PPI) continued to trend up, the consumer price index (CPI) started to taper off on moderating food prices post the Chinese New Year. Foreign exchange reserves were slightly up at US$3 trillion in February, which was better than the market expectation. Rigorous capital control has finally worked after seven consecutive months of declines.

The results season kicked off in March. In general, upstream companies reported better than expected results, thanks to rising commodity prices. The surprise special dividend announced by China Shenhua Energy raised expectations of increased dividend payout ratios from other SOEs with strong cash flow such as China Mobile.

The Fund was up 6.3%, outperforming the benchmark by 4.1%. Some of the top holdings such as Nexteer, AAC Technology and EDU were up high single to double digits in percentage terms on stronger than expected results. Exporters which were added into weakness during February staged a strong comeback in March and this also helped the Fund performance. Sector wise, auto, technology and education contributed the most to the Fund outperformance in March.

The Investment Adviser expects the market to take a breather after a strong first quarter but remains confident in the portfolio as the market focus is likely to shift from top-down to bottom-up now the liquidity driven rally has run its course. This should be beneficial for the Fund’s stock picking approach.


The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 18/04/17 and are based on internal research and modelling.