Monthly Commentary - December 2020
MARKET ENVIRONMENT
Chinese equities rose in December but lagged broader emerging and developed markets. Sentiment was driven by positive news around China’s continued economic recovery and low Covid-19 cases despite headlines around additional U.S. sanctions and the impact of new reforms on internet companies. The Trump administration continued to pressure Chinese companies in December, threatening to broaden the scope of an executive order released in November to ban United States persons from investing in securities issued by certain companies (and potentially their affiliates) designated as a “Communist Chinese military company.” We do not expect the executive order to have a material impact on Chinese markets broadly as these companies represent a very small percentage of Chinese market capitalization and the overwhelming majority of these securities are held by non-U.S. investors.
PERFORMANCE, CONTRIBUTORS AND DETRACTORS
For the month ending December 31, 2020, the Fund returned 5.59%, while its benchmark, the MSCI China All Shares Index, returned 4.16%.
From a sector perspective, the Fund’s holdings in financials contributed to relative performance, while Fund’s holdings in consumer staples detracted. A contributor among individual stocks was video content company Bilibili. The company, which caters to young viewers, attracted new users as the pandemic accelerated demand for online entertainment and social media interaction. We see Bilibili emerging as a new, distinct social media platform in its own right. With a growing user base and distinctive value proposition for its users, we find the company to have attractive long-term prospects.
A detractor among individual stocks was Chinese liquor company Kweichow Moutai. While sentiment was recently weak around the stock, we continue to see Kweichow Moutai as a premier national brand in China with tremendous brand equity. Kweichow Moutai continues to streamline its distributor network, while conducting more direct sales. We see opportunity for the company to expand margins.
OUTLOOK
Looking ahead, China seems well positioned for continued stability as monetary aggregates have been balanced for several months. Additionally, China’s rebounding economy and solid mid-teens consensus earnings growth should support current valuations. The newly released five-year plan could support businesses benefiting from the “dual-circulation” announcement focused on domestic demand and self-sufficiency in key areas of technology, innovation, health care and the digitalization of the economy.
While additional market volatility could lie ahead, we believe the long-term prospects for Chinese companies with strong competitive positions remain attractive. The pandemic has enabled some strong players to become even stronger and gain market share. And periods of market disruption have historically spurred new opportunities for innovation and business investment.