Monthly Commentary - October 2020
Chinese equity prices made gains in October as investors priced in lower geopolitical risk premium. In the month leading up to the U.S. presidential election, investors expected that a potential Biden victory and new administration in the White House could mark an improvement in U.S.-China relations. Regardless, China’s post-COVID recovery continues. While industrial sectors are flattening, consumption is rebounding with reasonable results being reported from the Golden Week of holiday shopping and tourism. Chinese policymakers met in late October to discuss the next “five year plan.” The focus was on further development of the domestic economy while trying to achieve middle-income status by 2035.
PERFORMANCE, CONTRIBUTORS AND DETRACTORS
For the month ending October 31, 2020, the Fund returned 4.93%, while its benchmark, the MSCI China All Shares Index, returned 4.73%. From a sector perspective, the Fund’s holdings in communication services contributed to relative performance, while Fund’s holdings in real estate and financials detracted.
A contributor among individual stocks was Estun Automation Co., China’s leading robot manufacturer with strong technical capabilities and an 80% overall rate in component self-sufficiency. Amid recovery in the industrial automation industry in China, the company has seen a rebound in orders, creating positive sentiment and leading to stock prices gains in the month. We believe local companies, through price competitiveness and improving quality, stand to gain market share against foreign competitors in this industry, where foreigners still hold the lion’s share of the market.
A detractor among individual stocks was Lepu Medical Technology, a pharmaceutical and medical device company whose core business includes medical stents. General procurement order (GPO) trends continue to pressure product pricing among the stents industry as a whole in China. At the same time, Lepu is focused on upgrading their product portfolio to areas such as biodegradable stents, which are less affected by price cuts. Longer term, we expect companies with the strong technology will survive. Lepu continues to upgrade its portfolio and we remain constructive on its prospects.
Domestic travel within China continues to pick up, adding another pillar of support for China’s economic recovery. Public health and safety measure remain effective, keeping the COVID pandemic in check. The government’s five-year plan includes a renewed focus on energy independence, which should encourage further investment in renewable energy sources, including solar power. The continued opening of China’s financial markets to foreign investment remains on a slow, but steady path forward. A new presidential administration in Washington won’t resolve all U.S.-China trade issues, but may result in a more collaborative approach to diplomacy and engagement. Market participants generally favor predictability, so a more unified U.S. foreign policy.