The rally continues in August with strong southbound flows benefitting financials


Fund Commentary
19 Sep 2016


The MSCI China total return index rallied 7.4% in August. Strong southbound buying in anticipation of the Shenzhen-HK stock connect, a delayed interest rate hike in the US and generally better than expected corporate interim results were the catalysts.

The MSCI China index once again outperformed CSI 300 index (i.e. the onshore China market) which was up only 3.9%. Sector-wise, real estate, internet, auto and financials outperformed while materials and energy stocks underperformed.

Since July, southbound buying has been strong. Its share of total market daily turnover has risen to as high as 14% and even over 30% for some blue chip names. Large cap companies with high dividend yields and stable earnings (e.g. banks) have been among the top buys of southbound money during the last two months. Expectations of a Renminbi devaluation are a major factor behind the strong flows as mainland investors are simply looking for capital preservation through quasi-US dollar assets. HK stocks fit their requirement since the HK dollar is pegged to US dollar. We expect southbound buying to persist as long as expectations of a Renminbi devaluation remain. This is positive for a long term re-rating of HK equities.

Since monetary easing has already led to skyrocketing property and land prices, there is no room for interest rate or reserve requirement ratio cuts. The government is likely to revert to expansionary fiscal policy to support growth if the economy fails to stabilise. July macro data was generally weak. The Investment Adviser thinks flooding in the summer may have hurt near term economic activity. Trade however was the bright spot. Export growth was up 2.9% yoy in Renminbi terms, further improving from 1.3% the month before. It seems the Renminbi devaluation over the last year has started to restore the competitiveness of Chinese export goods compared to 2015 when exports posted a decline of 2.8%.

The Fund rose 6.03% in August, but underperformed the benchmark by 1.32%. The relatively high cash level (nearly 10% of NAV) and the underweight in financials (especially banks) were the major reasons behind this. Since the H/A discount of Chinese banks has narrowed significantly to single digit percentage (versus over 20% previously) after the strong southbound buying, a continuation of the strong run by Chinese banks is now unlikely. During the month, the Investment Adviser took profits in property and insurance stocks and added positions in internet, auto OEM and textile names. After meeting with corporates at the post interim results road shows, the Investment Adviser feels incrementally positive on the second half outlook. After the strong market rally in July and August, the Investment Adviser predicts near term profit taking pressure, but remains constructive on the market and will take advantage of any market weakness to redeploy cash.


The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 15/09/16 and are based on internal research and modelling.