Monthly Commentary - March 2024
Market Environment
Chinese equities posted slight gains in March but faced continued pressure because of lingering, broad-based concerns including the implications surrounding the late year U.S. elections, deflationary pressures driven by excess capacity, the lack of large-scale policy support for the property sector and the sluggishness in the recovery in consumer demand. Notwithstanding the well-known concerns, investor sentiment is improving towards China based upon perceived risk/reward. Marginal year over year improvement in earnings expectations combined with stock multiples trading at roughly a 50% discount to February 2021 highs is giving investors' confidence that current valuations provide an adequate cushion for unforeseen risks.
Performance Contributors and Detractors
For the month ended March 31, 2024, China Fund, Inc. returned 2.19% while its benchmark, the MSCI China All Shares Index, returned 0.69%. From a sector perspective, the top three contributors to relative performance were consumer discretionary, industrials and communication services due to stock selection. On the other hand, the largest detractors were materials due to an underweight allocation, and financials and information technology due to stock selection. Turning to individual holdings, the largest contributor to absolute performance during the month was Meituan, China's largest food delivery service and internet platform company. The company did well due to its new focus on cost cutting efforts that would lead to lower losses and better profitability as well as more diminished concerns on competition. Conversely, Pinduoduo (PDD), one of China's largest e-commerce platforms that started its businesses with a focus on lower-tier city, price sensitive consumers, detracted the most. While the company continues to execute well, it has been a profit taking candidate given there are more news around geopolitical concerns on the stock.
Outlook
As we look out to the rest of the year, we see three reasons to be positive on markets in Asia. The first is the natural recovery that is taking hold after COVID. Economic growth is picking up and is being driven by domestic consumption. Secondly, when interest rates are cut in the U.S., we should see a cyclical pickup, particularly in markets like South Korea and Taiwan. Thirdly, we expect the second half of the year to yield slightly better news for China. We think earnings will continue to improve and there will be more initiatives to support the consumer. The ascendence of AI across all economic activity and industries across the global, we believe, will continue to be a growth driver for computer hardware, chip and equipment makers in Taiwan and across other markets in the region including China and Japan.