Monthly Commentary - August 2020
The MSCI China All Shares Index posted solid returns in August despite negative headlines about U.S. – China relations. Political tactics have so far focused on individuals and companies, as opposed to broad economic sanctions and negative policy. To date, the actions have been more disruptive to sentiment than economically damaging to either side. Looking at the U.S. side, it is difficult to decipher which portions of the negative rhetoric have true congressional support versus what is politically motivated by the election cycle. Chinese monthly economic data continued to show signs of recovery as reflected in the latest manufacturing and service PMI data as well business recovery statistics. Even the slow-to-recover consumer-oriented sectors are starting to show improvement including restaurant sales, cinema box office receipts and domestic travel. Domestic recovery is occurring alongside a stabilizing export sector and improving labor market, both of which should support better earnings prospects going forward.
PERFORMANCE, CONTRIBUTORS AND DETRACTORS
For the month ending August 31, 2020, the Fund returned 5.60%, slightly ahead of its benchmark, the MSCI China All Shares Index, which returned 5.28%. From a sector perspective, the Fund’s holdings in consumer discretionary contributed to relative performance. In contrast, the Fund’s holdings in real estate detracted from relative performance.
A contributor among individual stocks was e-commerce company JD.com, which experienced increased demand for its services during the pandemic. As the second largest e-commerce company in China, JD.com has a broad reach and its profitability is improving. Logistics-oriented businesses tend to be very capital intensive in their early years, but with much of JD.com’s logistic infrastructure already in place, we expect that the business may be less capital intensive going forward. China has many metropolitan densities and the complexity of making deliveries to most households is high, creating a competitive moat for an e-commerce player such as JD.com.
A detractor among individual stocks was information technology (IT) outsourcing and services provider Chinasoft, whose biggest customer is Huawei, the telecom equipment and consumer electronics manufacturer. Concerns over a slowdown in Huawei’s operations led to a decline in sentiment toward Chinasoft. 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. We also believe it has the potential to become one of the larger and more substantial IT outsourcing providers in China.
Schools have reopened in Wuhan, the first city to be hit by the pandemic earlier in the year. China’s effective health care response has played an important role in reopening school, businesses and government offices across China. Keeping the coronavirus under control is key to maintaining China’s economic recovery, and we continue to see reasons for optimism on the public health front. Positive sentiment among domestic Chinese consumers is spurring increased economic activity. U.S. – China political tensions could heat up heading into the U.S. election, but escalating rhetoric may have little impact on either economy. Looking ahead, we expect to see continued recovery in China’s economic activity. While China is not immune from a global slowdown, it may be better positioned than other large economies to maintain its long-term growth.