Q3 2018 Commentary – Mackenzie All China Equity Fund | Mackenzie Investments

Fund Commentary

Q3 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

  • Economic data in Q3 2018 were impaired by trade tensions, but impact of short-term monetary relief has begun to take effect. Fixed investments in manufacturing and real estate rose throughout Q3, but broader fixed investments saw declines due to significant reduction from financials as liquidity from non-banking financing channels dry up. Implementation of the new guidelines for the asset management industry is taking effect. The regulators’ efforts have resulted in a decline in M1 growth, while M2 growth was steady at above 8.0%.
  • Import and exports peaked in July at 27.3% at 12.1% due to pre-tariff stock ups and has since came down. Although PMI were still above 50, the declining activities were significantly dragged by New Exports.
  • The markets reported losses in Q3 exacerbated by the sustained trade tensions but recovered from mid-September bottoms at the end of the period. Both A-shares and Hong Kong markets saw declines across the board during the reporting period. The onshore mid-and-small cap companies were under the most pressure, while large-cap companies fared better.  In the onshore market, Financials, Energy, and Telecommunication Services saw returns of 8.86%, 8.27%, and 5.6% respectively, in local currency terms. Consumer Discretionary and Healthcare reported the largest losses at -13.09% and -13.86% respectively.


  • Government policies tended to be expansive. Both fiscal and monetary policies are likely to be supportive for the economy for the near term.
  • The China-US conflict is expected to continue, symbolized by Mike Pence’s recent speech at Hudson Institution. Based on our estimates, a full-blown trade war is possible. The 25% tariff on $250 billion Chinese goods (the worst-case scenario) may reduce GDP growth by approximately 1.0%. However, the depreciation of RMB and other proactive policies may offset most of the impact and lead to a final loss of 0.2% to 0.4% in GDP growth.
  • MSCI is expected to raise the percentage weight of included large-cap A-share stocks in MSCI EM Index from 5% to 20%, while FTSE has confirmed its initial A-share market inclusion as 5.5% of its emerging market index in 2019. These initiatives are likely to increase foreign investors’ interest in the A-share market. We believe that offshore capital will flow into A-share market with $30 to $50 billions of annual inflows, which would benefit the industry leaders.
  • The valuation of A-share stocks is relatively low compared to its historical range. The TTM P/E ratio of CSI 300 has dropped to 11.7x (as of Sep 30, 2018), even 10% lower than the historical lows in 2008.
  • Our sector allocation, style preference, and portfolio characteristics remain consistent. We remain cautious on non-core supply chain companies with heavy leverage, high valuation, weak cash flows and export orientation (such as, Apple’s suppliers). We still prefer large-cap companies which are safer during market deterioration. The portfolio overweighs domestic demand related stocks, such as baijiu, house appliances, auto makers, and healthcare. These stocks could benefit from the rising middle class in China, without being affected by the trade war.

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This document includes forward-looking information that is based on forecasts of future events as of September 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.