Monthly Commentary - November 2020
MARKET ENVIRONMENT
Chinese equities were higher in November. Some growth stocks within the communication services, health care and discretionary sectors took a breather while valued-oriented names within materials, energy and financials outperformed. Market participants believe a Biden administration could focus less on trade related issues, in favor of a multi-lateral approach on topics related to market access, climate change and human rights. Investors expect more predictability and less headline risk associated with U.S. – China relations going forward. On the domestic front, the latest Chinese economic data points to continued recovery led by consumption, manufacturing activity and investment. In addition, analysts expect upside earnings momentum to carry through 2021 driven by robust economic activity.
PERFORMANCE, CONTRIBUTORS AND DETRACTORS
For the month ending November 30, 2020, the Fund returned 2.54%, while its benchmark, the MSCI China All Shares Index, returned 3.93%. From a sector perspective, the Fund’s holdings in communication services contributed to relative performance, while Fund’s holdings in consumer discretionary detracted.
A contributor among individual stocks was China Merchants Bank, a prominent retail bank in China, with access to high net worth clients, thus a strong retail franchise. Banks in China are valued attractively in our view, with good dividend yields. China Merchants Bank exemplifies this trend. The company is well managed, with strong long-term growth potential. The stock rose in the month, buoyed by strong company fundamentals and positive sentiment toward the banking sector.
A detractor among individual stocks was Tigermed, the largest domestic clinical trial provider in China. Health care stocks overall saw pressure on increased price cuts seen in generic drugs and medical devices. We still like the fundamentals of the company given it provides a service catering to increased R&D spend of China’s companies hoping to shift more into innovative drugs.
OUTLOOK
Looking ahead, we expect domestic consumption and services to continue driving China’s economic growth. Expansion of consumer buying power in lower-tier cities will remain a key theme we are following. With the coronavirus pandemic held in check across China, cities, governments, businesses and schools remain open for regular, daily activities. Government micro-reforms in areas such as health care, education and housing continue to support sustainable growth in economic activity. Regardless of the potential for U.S. – China trade tensions to ease under the incoming Biden administration, we expect that the local information technology ecosystem and supply chain within China will continue to develop under its own momentum. While some sectors of China’s equity markets are starting to look expensive, there is still a lot of untapped value that can be uncovered through an active approach to security selection. While China is not immune from the potential impact of a slowdown in the global economy, it may be better positioned to weather any such slowdown by drawing on domestic growth drivers.