Monthly Commentary - September 2020
MARKET ENVIRONMENT
Chinese equities pulled back in September, as investors took profits on the back of strong results earlier in the calendar year. Within the MSCI China All Shares Index, the consumer discretionary sector was the sole positive contributor in September—all other sectors posted negative returns during the month. Energy stocks were the weakest followed by consumer staples and technology names. Health care and financials were equally weak. On a positive note, Chinese manufacturing data points to a continued V-shaped recovery and a bright spot within the data suggests that small, private businesses are beginning to participate within the rebound. In addition, Chinese official report no new domestically transmitted cases of COVID in the month.
PERFORMANCE, CONTRIBUTORS AND DETRACTORS
For the month ending September 30, 2020, the Fund returned -2.91%, while its benchmark, the MSCI China All Shares Index, returned -3.43%. From a sector perspective, the Fund’s holdings in real estate and health care detracted from relative performance. On the other hand, the Fund’s holdings in consumer staples and communication services contributed to relative performance.
In contrast, a detractor among individual stocks was real estate developer CIFI Holdings Group. The real estate industry has been sluggish as the pandemic disrupted sales in China earlier in the calendar year. In addition, China’s government has been restricting the use of leverage across the industry in an effort to prevent excessive debt levels among real estate developers. We remain constructive on CIFI Holdings’ long-term prospects. Property sales have picked up in recent months and the company has an enviable nationwide footprint, giving it a strong base for future growth. On a long-term view, we expect demand for real estate to recover.
A contributor among individual stocks was Xinyi Glass, a leading glass producer in China. The company manufactures glass for solar panels, as well as float glass, which gets refined into architectural glass. Xinyi’s vertically integrated business model benefits from growing demand for many different types of glass in China. In terms of solar panels, demand for solar glass is growing, as solar energy prices in China become more competitive with energy prices associated with fossil fuels. In terms of demand for architectural glass, many construction projects that were delayed during the first half of the year because of the COVID pandemic are resuming, so we expect to see a pickup in demand as projects get underway again. In addition the government has been restricting new companies from entering the space to prevent overproduction of glass.
OUTLOOK
Fiscal stimulus in China has been incremental in scope and highly targeted, a trend we expect may continue. Interest rates in China have moved higher, reflecting China’s economic resilience amid the pandemic. Looking ahead, we expect to see continued recovery in China’s economic activity. COVID-19 remains a risk for economies globally, including China. While small pockets of coronavirus infections still occasionally emerge, China remains successful at flattening its curve of COVID-19 infections. Vigilant about testing, quarantining known cases and contact tracing, China has had the most success among large economies in our view in combatting the virus.