Winner takes all

BY LILIAN CO In September, Chinese equities kept trending up, with the MSCI China Index returning 0.84%. Compared to previous bull markets, investors currently find themselves in uncharted waters after nine consecutive positive months.

During the month, investors shrugged off share placements and repeated missile tests from North Korea. They however reacted positively to strong US market and news regarding the reformation of State Owned Enterprises (SOEs) such as an announced merger of the construction companies CNBM and SINOMA and the restructuring of Chalco’s (aluminium producer) assets.

Throughout the month, the “winner-takes-all” phenomenon continued: Market leaders were easily up 50% over the month triggered by industry-specific catalysts. China’s property stock performance was however volatile. The sector initially surged following expectations regarding property control relaxations but later declined after new tightening measures (restrictions regarding the resale of properties in certain cities) were announced instead. New energy-related auto stocks also had a strong run following talks on the implementation of an electric vehicle policy in 2030.

Meanwhile, technology stocks became a tale of two cities: while Apple-related supply chain stocks suffered due to the uninspiring iPhone 8 launch, Android-based component stocks continued to do well in anticipation of strong Q4 sales. Macau gaming stocks and HK jeweler retailers outperformed the market on the back of a strong HK retail sales recovery. On the other hand, banking stocks experienced profit taking after the strong run during the previous month.

August macro data in China was largely in line with the better than expected Purchasing Manager Index (PMI). Simply put, the macro data published in August did not raise any concerns regarding the recovery path of China’s economy. With the 19th Party Congress scheduled to take place on 18 October, the government is likely to ensure abundant liquidity to maintain a buoyant equity market.

The Investment Adviser is increasingly more comfortable regarding the macro outlook in China. The Chinese Government is no longer relying on monetary measures to stimulate growth. It is now focusing on supply-side reforms and financial deleverage in order to curb excess capacity, which in turn leads to improving corporate profitability.

Throughout the month, the Fund gained 4.4%, outperforming its benchmark by 3.56%. Sectors that contributed to the outperformance included packaging paper, technology, Macau gaming and auto.

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The views and statements contained herein are those of the LBN Advisers Limited in their capacity as Investment Advisers to the Fund as of 15/10//2017 and are based on internal research and modelling.

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