Monthly Commentary - July 31, 2023
Market Environment
China equities rebounded in July as weak sentiment faded alongside a flurry of government policy announcements after the Politburo meeting on July 24. Some of the policy announcements included the relaxation of platform company regulation, incentives to lift household consumption, loan support for property developers and measures to stabilize the Chinese currency. Data suggests that manufacturing remains sluggish as new domestic and export orders are slowing and raw materials and finished goods inventories are falling as re-stocking pressure remains low. Within the MSCI China most sectors posted positive gains in July especially consumer discretionary names led all sectors followed by strong returns in health care, communication services and staples.
Performance Contributors and Detractors
For the month ending July 31, 2023, China Fund, Inc. returned 12.02% while its benchmark, the MSCI China All Shares Index, returned 9.09%. From a sector perspective, the portfolio›s allocation to consumer discretionary, and stock selection within financials and consumer staples contributed the most to relative performance. On the other hand, industrial and real estate detracted the most from relative performance.
Turning to individual holdings, Pinduoduo, one of China›s largest ecommerce platforms that started its businesses with a focus on lower-tier city, price sensitive consumers directly through its interactive shopping experience, was among the largest contributors to both absolute and relative performance. The company›s platform has been growing faster than peers and has also experienced continued strong momentum of delivering monetization of the business model. On the other hand, Country Garden Services underperformed given continued worries about the property market and financial issues at the parent company. While it is one of China›s largest developers, Country Garden Services has a higher degree of exposure in lower tier cities where the property market risk is more pronounced.
Outlook
Property market struggles continue to be present and negative news flow has resulted in continued volatile performance in this space. We continue to monitor this segment of the market closely as China's pace of economic recovery is broadly still dependent on a functioning property market. Looking ahead, the earnings story should benefit from easier comparables with the second half of 2022. We expect earnings to continue to be a catalyst. However, given weak sentiment, China needs to deliver a very strong set of earnings to re-rate in a meaningful way, and we remain more cautious on that front and expect only a gradual recovery ahead. Sentiment on the ground remains weak, which could call for more supportive policies. At the same time, we continue to see more companies delivering on monetization and increased room for shareholder return as more companies consider buybacks and dividends. Geopolitics remain a relevant concern, and unfortunately, does not offer much optimism at the moment, leading to continued volatile market conditions.