Q3 2018 Commentary
- Fund performance is not available for funds with a history of less than one year.
- 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.