Monthly Commentary - June 2020
MARKET ENVIRONMENT:
While small pockets of coronavirus infections still occasionally emerge, China remains successful at flattening its curve of COVID-19 infections. China’s progress in slowing the virus has been the result of widespread testing, contact tracing and mask adoption. Life in China is slowly normalizing. On the back of rising domestic sentiment, Chinese equities were strong performers in June. Markets also experienced some volatility in the month as the Chinese government passed an amendment to the national security laws in Hong Kong. This action attracted international attention and protests from Hong Kong citizens. Uncertainty around this legislation combined with feared backlash from foreigners impacted markets in the June, but equity prices continued to rise. Chinese equities remained strong diversifiers for global investors. The Chinese government’s track record of willingness and ability to support markets and their economy during volatile times has become a source of confidence for investors.
PERFORMANCE, CONTRIBUTORS AND DETRACTORS:
For the month ending June 30, 2020, the Fund returned 10.90%, outperforming its benchmark, the MSCI China All Shares Index, which returned 9.35%. From a sector perspective, the Fund’s holdings in the industrials and communication services sectors contributed to relative performance. In contrast, the Fund’s holdings in the consumer discretionary and health care sectors detracted from relative performance.
A contributor among individual stocks was Luxshare Precision Industry, a stock traded in China's domestic A-share market. Luxshare Precision Industry is a handset component maker that is moving into new business areas by focusing on higher value manufacturing opportunities. In addition, Luxshare is diversifying its client base outside of smartphones, into wearable tech and other non-smartphone industries. The company demonstrates strong execution and its addressable market is expanding.
A detractor among individual stocks was Ping An Insurance Group. Insurers have come under pressure given concerns of a lower interest rate environment, as well as interruption of business activity by the pandemic. However, we remain constructive on the company’s long-term prospects. Life insurance adoption among consumer is growing, with the potential to generate higher profitability for insurers.
OUTLOOK:
Fiscal and monetary policy in China remains supportive, but modest in scope. As the private sector continues to expand, the government has become increasingly reliant on market forces and market-oriented practices to help guide economic growth. We continue to believe the government, while it has ample ammunition to deploy financial support in extreme situations, is likely to continue to use modest, targeted measures.
Meanwhile, the curve of new COVID-19 infections remains flat. On average, we estimate about 85% of factory operations in China have recovered. We also monitor whether kids are going back to school, which is definitely under way and a positive development as it alleviates parents’ childcare needs. We also track subway traffic, which has improved from being down about 60% two months ago to being down only about 30% in the first week of June.
We are encouraged by the recovery’s positive trajectory. It’s also worth noting China is keenly focused on minimizing the impact of a potential second wave. The responses to many of the virus containment measures on the ground has been positive, as demonstrated by adherence to social distancing guidelines and observance of recommendations for safe factory operation. This points to a sustainable recovery phase for China, which we believe is important.