Monthly commentary - August 2021
Chinese equities were largely flat in August and negative market sentiment generated by the recent government regulatory announcements eased in the second half of the month. Cyclical, value-oriented sectors outperformed, with materials, energy and industrials posting the strongest gains while health care, consumer discretionary and communication services companies lagged. Interestingly, those same lagging sectors for the month were some of the best performers during the last week of August, as investors were attracted to low valuations, especially within beaten-down internet services companies.
PERFORMANCE, CONTRIBUTORS AND DETRACTORS
For the month ending August 31, 2021, the Fund returned –0.55%, while its benchmark, the MSCI China All Shares Index, returned 0.23%. From a sector perspective, the Fund’s holdings in the industrials, information technology and materials sectors detracted from relative performance, while holdings in financials and health care contributed to relative performance.
Among individual holdings, e-commerce company JD.com was a top contributor to performance. JD.com’s stock price gained ground in August after being weighed down earlier in the year by market concerns stemming from China’s regulatory announcements directed at large internet platforms. Despite the uncertain regulatory backdrop, JD.com reported strong second quarter earnings late in the month, which boosted market sentiment toward the company.
Sungrow Power Supply Company, a solar component manufacturer, was a performance detractor during the month. Sungrow’s stock experienced some profit taking as the solar power industry as a whole experienced a pullback after a strong period of outperformance. Our investment thesis for Sungrow remains intact, as the company continues to benefit from renewable energy growth. China’s plan to be carbon neutral by 2060 has promoted significant volume expansion opportunities across the solar chain, and we see additional opportunity for the company to expand its total addressable market as the energy storage system market grows.
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.
We are also optimistic about China’s medium-term economic prospects based in large part on the continuing evolution of government policy designed to embrace private enterprise and markets. Private firms are the engine of China’s growth and job creation and are China’s most innovative firms, and the government’s economic growth plans are based on innovation.