Monthly Commentary - February 2022
February was broadly negative and choppy for the broader emerging and Asian equity markets. Despite a small upward bounce from the onshore A-share market, Chinese equities declined in February. During the first two weeks of the month, markets absorbed the negative rhetoric surrounding the increased likelihood of Federal Reserve interest rate hikes beginning in March together with complicated U.S. – China relations. In addition, the Chinese government’s zero-COVID policy continued to weigh heavily on certain sectors. Nevertheless, economic stability and moderate growth remain key objectives for the Chinese government, and we expect downside risks to be met with accommodative monetary policy and other growth initiatives.
Within offshore Chinese equities, growth names within communication services and consumer discretionary sectors led the MSCI China All Shares Index lower, followed by real estate and financials. On the other hand, materials and energy stocks were the best performers during the month. Chinese small and mega caps underperformed mid and large caps in February.
PERFORMANCE, CONTRIBUTORS AND DETRACTORS
For the month ending February 28, 2022, The China Fund, Inc. returned -5.64% while its benchmark, the MSCI China All Shares Index, returned -1.23%. From a sector perspective, the Fund’s holdings within consumer discretionary and financials detracted the most from relative performance. On the other hand, the Fund’s holdings in information technology contributed the most to performance.
A contributor among individual stocks was semiconductor equipment manufacturer Zhejiang Jingsheng Mechanical & Electrical Co., which manufactures equipment for solar wafer producers. We believe the company is a beneficiary of growing solar panel demand both in China and globally. The industry saw a correction in the fourth quarter of 2021 as new solar panel installations stalled due to the rising cost of solar modules. However since the beginning of this year, as upstream raw material pricing eased, solar module costs have come down—spurring downstream demand and improving market sentiment in this sector.
Detractors among individual stocks this month include several internet platform companies, including Alibaba, Meituan, Tencent and Pinduoduo. Foreign-investor sentiment continued to weigh on this sector given the recent additional regulatory pressures placed on these companies. While internet platform companies’ valuations have pulled back considerably, they largely remain profitable and scale-oriented businesses.
Looking ahead, we continue to monitor geopolitical developments, the property market and how China manages its COVID policy. While geopolitics is hard to predict, the latter two present some opportunities as we head into a more supportive property market environment and an eventual end to COVID. It may take some time, but we believe China should be able to deliver on both these fronts. However, at this juncture, stock price movements have de-coupled from the fundamentals of the companies behind them. Therefore, this risk on sentiment is a real one that is hard to manage and control for. Hence, as investors, we believe patience is needed but the longer-term opportunity remains intact—China’s integration with the rest of the world and the scale of its economy is too big to ignore. At the same time, the equity markets continue to deepen. With the expanding breadth of companies, many of which have secular prospects, we 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.