Q2 2018 Commentary – Mackenzie All China Equity Fund | Mackenzie Investments

Fund Commentary

Q2 2018 Commentary

Mackenzie All China Equity Fund

Performance Summary

  • Fund performance is not available for funds with a history of less than one year.

Market Review

  • The PBoC announced a 50bps Reserve Requirement Ratio (RRR) cut for a wide range of banks to support debt-to equity swaps and increase lending to small and micro enterprises, both metrics were included in the banks’ Macro-Prudential Assessment (MPA). The RRR cut will release around RMB 700 billion reserves.
  • The US has announced 25% tariffs on $34 billion worth of Chinese goods containing industrial machinery and electrical products, $16 billion worth of goods may be included later. China has responded the tariff hike with similar magnitude.
  • RMB/USD exchange rate has crossed the 6.7 threshold for the first time since August 2017. The currency slump is a reflection for concern over trade friction and a narrowing yield spread between China and the US.
  • In terms of the market performance in Q2 2018, Shanghai Composite Index dropped by 10.1%, SME slumped by 13.0%, and GEB decreased the most by 15.5%. As of sector performances, all sectors except for Consumer Staples recorded negative performance. Consumer Staples sector added by 2.8%, while IT and Real Estate were the two sectors with worst performance.


  • We are structurally positive on the China's economy outlook over the long term, mainly because: 1) strong consumption power from rising middle class and much stronger consumption tendency for millennials than the older generation. 2) technology and innovation nowadays take a much bigger role in the economy vs. ten years ago, and social productivity is improving significantly from the technology spillover effect.
  • In the near term, we think China’s economy will be bumpy, due to the uncertainty of a China-U.S. trade war, and deleverage of the economy. We don't think that trade conflict between China and U.S. can be solved any time soon. Our view is that the US-China trade war may have a negative impact for the two economies. Although China posts an annual trade surplus, U.S. exports to China have significantly higher value add. In addition, the trade surplus from China is primarily generated by U.S. subsidiaries operating in China. Last year, U.S. subsidiaries in China generated 650 bullion USD in revenue. Apple alone generated more than 45 billion USD from China in 2017. All factors considered, the actual trade and investment between the two countries are fairly balanced. We estimate that 50 billion USD goods affected by the 25% tariff will impact China's GDP by 13-20bps.
  • It is not surprising to see that in the last couple of months, China equity was over-reacting to the short-term uncertainty, and under-estimated the growth potential of the economy over the long term. The valuation of CSI300 is around 11.4 P/E(ttm), or less than 10 P/E(ntm), with more than 20% earnings growth in 2018. We think that the A-share market provides a very attractive risk adjusted return over the long term, although the volatility might be on the upward trend in the near term.
  • In this portfolio, we continue to take positions in Chinese companies that are globally competitive, especially ones with independent R&D, strong brand, strong balance sheet, and reasonable valued companies that are focused on domestic consumption. We expect these companies will outperform the market. We believe the Chinese market will continue its trend to gradually open in sectors including finance and automobiles. Previously protected industries and companies without core competitiveness within its global supply chain may feel the most pressure.
  • We prefer large cap companies which are trading at a significant discount to small cap companies with even higher earnings growth potential.

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This document includes forward-looking information that is based on forecasts of future events as of June 30, 2018. Mackenzie Financial Corporation will not necessarily update the information to reflect changes after that date. Forward-looking statements are not guarantees of future performance and risks and uncertainties often cause actual results to differ materially from forward-looking information or expectations. Some of these risks are changes to or volatility in the economy, politics, securities markets, interest rates, currency exchange rates, business competition, capital markets, technology, laws, or when catastrophic events occur. Do not place undue reliance on forward-looking information. In addition, any statement about companies is not an endorsement or recommendation to buy or sell any security.

The content of this commentary (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.