Sentiment towards A-Shares boosted during September

BY LILIAN CO

In September, market sentiment remained fragile as investors saw no end to the US-China trade tensions. The MSCI China Index lost 1.4% during the month, marking the fourth consecutive month of decline. Following repeated statements from the Chinese government that the country would not weaponise its currency to counter US sanctions, the Renminbi edged down slightly to 6.8688.

Sector wise, technology, China property and healthcare stocks underperformed, while telecom and infrastructure stocks outperformed.

During the month, the 10% import tariff on USD200 bn worth of Chinese goods imposed by the US came into effect. As retaliation, China announced a 5-10% tariff on US$60 bn worth of US goods, despite Trump’s warning that more was to come should China retaliate. The Investment Adviser expects the deadlock to last until the US election in November.

In September, the FTSE announced that A-shares would be included in its indices starting in June 2019, whilst the MSCI considers to raise the weight of China A-shares from 5% to 20% in 2019, boosting sentiment towards A shares. The CSI 300 Index rose 3.1% in September, bucking the negative trend of the MSCI China Index. Hong Kong banks finally raised prime rates by 12.5 basis points (bps) for the first time in 12 years following the latest 25 bps hike of the Fed’s benchmark interest rate. Large Hong Kong banks are benefitting from a rising interest rate environment, being net lenders in the interbank market.

Government intervention was seen across various sectors during the month, spreading from education and online gaming to healthcare and natural gas industries. In the healthcare sector, the government introduced a new bidding mechanism in an attempt to drive down drug prices. As a result, eleven cities banded together to start a tender process to jointly procure 33 drugs, with the winner being guaranteed a share of 70% of the contract size in exchange for a sharp reduction in drug prices. With regards to natural gas distribution, the government has been looking to remove the connection fee, sending healthcare and natural gas distribution stocks higher. The rumour surrounding a special tax on online games and more stringent rules on teacher qualifications in after school tutoring continued to depress education and internet stocks in September.

The Fund* lost 4.9% on an absolute basis in September, with the Fund’s overweight in China property continuing to drag on performance (-1.7% contribution to return). The team perceives current valuations to be misaligned and believes that patience is needed until the resolution of the trade dispute.

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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 19/10/18 and are based on internal research and modelling.

Further insights

October 2018

Italy and the Fed - Two key drivers of the bond markets in September

In September, the trade war between the US and China, emerging markets (Turkey in particular), political tensions around the world (Iran and the impact on oil prices) and - to a lesser extent - Brexit continued to be a source of concern. This said, the Italian budget and the FOMC were the most awaited key events of the month.