Monthly Commentary - July 2021
MARKET ENVIRONMENT
July 2021 was a difficult month for Asia, and Chinese equities were Asia’s worst performers in the month. Market weakness stemmed from a series of regulatory announcements by Chinese regulators related to the technology and for-profit education industries weighed on investor sentiment as to the operating environment within China and the potential effects on profitability of Chinese companies. In addition, the Chinese markets experienced a slight liquidity squeeze during the latter part of the month caused by the peak season for tax payments.
China’s economy continued to recover from COVID-19. While manufacturing has completely recovered from the pandemic, periodic, small COVID-19 outbreaks have left many Chinese consumers wary of spending on services that require gathering in confined spaces, and therefore spending on services may take longer to recover than we expected a month ago.
PERFORMANCE, CONTRIBUTORS AND DETRACTORS
For the month ending July 31, 2021, the Fund returned –7.64%, while its benchmark, the MSCI China All Shares Index, returned –11.09%. From a sector perspective, the Fund’s holdings in the real estate, materials and communications services sectors detracted from relative performance, while holdings in consumer discretion and industrial sectors contributed to relative performance.
Among individual stocks, Sungrow Power Supply Company, a solar component manufacturer benefiting from renewable energy growth, was the largest contributor to absolute and relative performance. China’s plan to be carbon neutral by 2060 has promoted significant volume expansion opportunities across the solar chain. Sungrow has strong product offerings in the high end inverter space and strong execution by management has grown the company’s global market share considerably over the past decade. Additionally, there is further opportunity to expand Sungrow’s total addressable market as the energy storage system market grows.
A detractor among individual stocks was Bilibili, Inc., one of China’s leading internet entertainment platforms catering to Gen Z audience (born after 1990s). While Bilibili’s operational metrics from user acquisition and engagement continues to trend positively, China’s policies to regulate the health and development of the Chinese internet industry continues to put pressure on internet names. We are cautious about the ongoing regulations but believe that larger companies will be more in compliance with any proposed new changes and can adapt their businesses more successfully.
OUTLOOK
Looking ahead to the rest of the year, stock market volatility can continue to hurt sentiment but should not have a meaningful impact on macro-economic performance, in our view. While market concerns of increased regulatory scrutiny may persist over the near term, we expect stock prices may be less influenced by macro forces of synchronized recovery, regulatory oversight and inflation fears and more influenced by company fundamentals and secular growth. In fact, we believe that company fundamentals and attractive valuations can overcome the headwinds of negative headlines and rhetoric.
Given the weaker performance of some sectors this year, valuations in China are starting to look reasonable, and in a global context, actually quite attractive. 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.