Monthly Commentary - June 2021
MARKET ENVIRONMENT
China equity markets recovered in the second quarter post a volatile first quarter and were slightly higher in June. China's macro environment remained relatively stable and the central bank's monetary policy remained largely unchanged. Consumption industries in China largely remain on a recovery track although consumption patterns have not entirely recovered to pre-COVID levels. Most cyclical sectors in China were weak in June. The financials, materials and real estate sectors were fell sharply during the month while health care, information technology and energy were strongest. Rotation from growth to cyclical names seems to be slowing as the past surge in industrial profits seems priced into markets. We expect Chinese regulators to continue to fine tune liquidity and credit as to maintain a steady economic trajectory and balanced monetary aggregates.
PERFORMANCE, CONTRIBUTORS AND DETRACTORS
For the month ending June 30, 2021, the Fund returned 0.75%, while its primary benchmark, the MSCI China All Shares Index, returned -0.44%. From a sector perspective, stock selection in the financials sector contributed to relative performance. In contrast, stock selection in the consumer discretionary sector detracted from relative performance.
Among the portfolio›s financials holdings, our holding in China's premiere banking franchise, China Merchants Bank that employs a prudent approach and commands good asset quality did well given attractive valuations and the bank's ability to continue to provide financial solutions to high net worth individuals.
A detractor among individual stocks was Midea Group Co., a domestic demand-oriented consumer discretionary company, which suffered from weaker performance given concerns about rising raw material prices compressing margins. However, we believe that consumer demand still remains resilient in China, which will facilitate the ability to pass on prices in the near future.
OUTLOOK
First quarter earnings in China point to a continued recovery in China's economy. Encouragingly, China's economy continues to benefit from growth coming from a broad range of different sectors and industries. As a result, cheaper parts of the market have also seen performance recovery given continued earnings delivery. Looking ahead to the second half of the year, we continue to expect corporate earnings to remain on track. While market concerns of increased regulatory scrutiny may persist over the near term, we remain focused on the longer-term fundamentals of the domestic growth engine. Among the most attractive themes from a secular growth perspective include technology upgrades, health and wellness trends, and services that enhance quality of life and premium consumer goods.