Monthly Commentary - October 2021
MARKET ENVIRONMENT
After a severe sell off in the third quarter, Chinese equities were a bright spot in October despite slower macro-economic indicators. China’s regulatory announcements took a pause, allowing for several large platform companies within the communication services and consumer discretionary sectors to rebound. However, lingering worries about Chinese economic growth caused by restrictive liquidity for its real estate sector, supply side disruptions as well as isolated, COVID-related lockdowns dampened sentiment towards the end of the month. Consumer-oriented stocks, especially within the consumer discretionary, consumer staples and communication services sectors were higher in the month, partially recovering year-to-date losses. Meanwhile, the real estate and energy sectors lagged as China Evergrande Group contagion worries continued and the publicized electricity shortages after the government’s pressure for restrictions of energy production to reduce carbon output contributed to ongoing headwinds.
PERFORMANCE, CONTRIBUTORS AND DETRACTORS
For the month ending October 31, 2021, the Fund returned 3.23%, while its benchmark, the MSCI China All Shares Index, returned 2.78%. From a sector perspective, the Fund’s holdings in information technology and industrials were the top contributors to relative performance. On the other hand, the Fund’s holdings in financials and communication services detracted from relative performance.
Among individual holdings, e-commerce company JD.com was a top contributor to performance. JD.com’s stock price gained ground in October 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 August, which boosted market sentiment toward the company.
A detractor among individual stocks was Times China Holdings, a southern China focused property developer which experienced weak performance due to a continued tighter policy environment. We believe that this presents the opportunity for market consolidation over the longer term, and that leading regional players such as Times China should be able to grow market share under these conditions given their strong balance sheets. Real estate opportunities in China are also attractively valued and may offer high dividend yields making the risk reward still favorable in our view.
OUTLOOK
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 quite attractive in a global context. We remain focused on the longer-term fundamentals of the domestic growth engine and believe there are many opportunities in China that stand to benefit from the country’s efforts at increased domestic self-sufficiency across a myriad of industries. 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.