Monthly commentary - September 2021
Chinese equities continued to show weakness in September, following recent regulatory announcements created on technology and for-profit education. In addition, recent economic data has pointed to a slowdown of economic growth which has been compounded by worries of a weaker real estate sector, as China Evergrande Group, one of the country’s largest real estate developers, has run into financial stress. Fears of systemic financial market contagion and the publicized electricity shortages after the government pressed for restrictions of energy production to reduce carbon output contributed to ongoing headwinds. Consumer discretionary, materials and information technology sectors were weakest during the quarter, while the healthcare sector was among the best performers.
PERFORMANCE, CONTRIBUTORS AND DETRACTORS
For the month ending September 30, 2021, the Fund returned -4.92%, while its benchmark, the MSCI China All Shares Index, returned -2.70%. From a sector perspective, the Fund’s holdings in consumer staples and industrials were notable detractors from relative performance. On the other hand, the Fund’s holdings in financials and health care contributed to relative performance.
Individual holdings that contributed to the Fund’s relative performance during the month include brokerages CITIC Securities Co. and China Merchants Securities Co. The Fund’s significant allocation to brokerages stems from cheap valuations and still strong fundamentals and earnings growth given their ability to expand service offerings as China’s capital markets deepen.
Two detractors among individual holdings include property management services provider KWG Living Group Holdings and real estate development company Times China Holdings. Both companies continued to experience weakness on an ever tightening policy environment which has increased investors’ concerns about the outlook of the overall property market in China. However, given the recent sharp pull back in valuations, we continue to believe real estate opportunities in China are attractively valued and may offer high dividend yields, making the risk/reward prospects even more favorable.
First half earnings results announced in the September quarter in China showed continued COVID recovery and were generally encouraging across the board, except for a weaker recovery in some parts of consumption, e.g., consumer staples, which we continue to monitor closely. These earnings results also shed some light on potential government directives over the next year, which we believe will be positively directed toward China’s efforts at increased domestic self-sufficiency across a myriad of supply chains (e.g., technology and health care) and environmental efforts to further promote green energy developments in China. We believe there are many opportunities in China that stand to benefit positively from these developments and expect to see meaningful volume expansions, which should help drive positive earnings growth across these supported industries.