Monthly Commentary -November 2021
MARKET ENVIRONMENT
China equities underperformed regional Asian stocks in
November, even as Chinese regulatory announcements slowed in recent months. Fears
of an economic growth slowdown in China were exacerbated late November as the
Omicron coronavirus variant threatened the reopening of major economies further
dampening recovery. China›s domestic equity market sentiment once again diverged
from foreign sentiment. Local A-shares, especially broad indices including
small and mid caps, posted positive returns as Chinese investors continued to invest
into local mutual funds. Chinese investors reacted positively to the
government›s bias towards increased lending into domestic supply chain
companies, especially within the information technology and renewable energy
industries. Large platform consumer discretionary names struggled, as did the
energy and utilities sectors.
PERFORMANCE, CONTRIBUTORS AND DETRACTORS
For the month
ending November 30, 2021, the Fund returned -5.11%, while its benchmark, the
MSCI China All Shares Index, returned -3.70%. From a sector perspective, the
Fund›s holdings in consumer discretionary and utilities were the top contributors
to relative performance. On the other hand, the Fund›s holdings in financials,
health care and materials 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. Longer term, we
expect Chinese stock prices may be less influenced by macro forces such as
regulatory intervention and inflation fears and more influenced by company
fundamentals and secular growth. Given the weaker performance of some sectors,
valuations in China are also 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.