Monthly Commentary - July 2020
MARKET ENVIRONMENT:
Chinese equities generated strong gains in July. Monthly economic data showed further signs of recovery as reflected in July’s manufacturing PMI data as well business recovery statistics. At the same time, China’s V-shaped economic recovery has been unevenly distributed. Manufacturing rebounded convincingly while entertainment, travel and dining related consumption continue to lag. 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. Headlines during the month included renewed trade and political tensions between the U.S. and China.
PERFORMANCE, CONTRIBUTORS AND DETRACTORS:
For the month ending July 31, 2020, the Fund returned 9.94%, trailing its benchmark, the MSCI China All Shares Index, which returned 11.33%. From a sector perspective, the Fund’s holdings in consumer discretionary and health care detracted from relative performance. In contrast, the Fund’s holdings in information technology contributed to relative performance.
A contributor among individual stocks was information technology (IT) outsourcing and services provider Chinasoft. We believe Chinasoft has the potential to become one of the larger and more substantial IT outsourcing providers in China. The company’s biggest customer is Huawei, the telecom equipment and consumer electronics manufacturer. Concerns over a slowdown in Huawei’s operations led to some recent volatility in Chinasoft’s share price. Despite near-term concerns about Huawei’s growth prospects, we believe Chinasoft has attractive long-term growth potential, with the ability to grow and diversify its client base over time.
A detractor among individual stocks was Sinopharm, China’s largest pharmaceutical distributor with a meaningful nationwide presence. The company saw weak results in the first half of 2020 owing to negative economic impact from the COVID-19 outbreak. Hospital visitation during the pandemic fell, which reduced pharmaceutical distribution needs. At the same time, the company saw increased operational expenses associated with the prevention and containment of the virus situation. Sinopharm trades at attractive valuations and commands a still large and dominant presence in China’s health care distribution industry. We continue to monitor this position for updates and operational improvements.
OUTLOOK:
The IMF forecasts that China will be the only major economy to grow on a year-over-year basis in 2020. Signaling China’s overall economic health, recovery has come without dramatic government stimulus. Moreover, the government’s long-running effort to dial down risk in the financial system continues. Unemployment remains a concern, but the continuing rebound in consumer spending suggests that the government’s support for workers has provided a cushion for those who have lost jobs. Risks in the second half of 2020 include the potential for a second wave of COVID-19 infections, as well as renewed political tensions between the U.S. and China, driven by the U.S. election cycle, whereby an escalation of rhetoric could result in bi-lateral sanctions or other restrictive measures. On balance, however, we remain optimistic about the long-term prospects for China’s equity markets. Encouragingly, domestic investor sentiment in China is strong. As always, we believe it is important to maintain a long-term time horizon when investing in Chinese equities.