Monthly Commentary - January 31, 2023
Chinese equities continued the rebound from the last quarter of 2022 and posted some of the strongest results within global markets in January. The roll-back of COVID restrictions continued to gain momentum during the month as families were able to travel and reunite to celebrate Chinese New Year for the first time in over two years. Consumption indicators including those focused on domestic tourism, local services and entertainment are trending higher, albeit from a very low base, further spurring speculation of a forthcoming increase in consumer discretionary activity and overall mobility.
Performance Contributors and Detractors
For the month ending January 31, 2023, China Fund, Inc. returned 13.95% while its benchmark, the MSCI China All Shares Index, returned 11.06%. From a sector perspective, stock selection and allocation within financials and consumer discretionary contributed the most to relative performance. On the other hand, the portfolio’s under allocation and stock selection within communication services and materials detracted the most from performance.
Turning to individual holdings, Pinduoduo, one of China’s largest ecommerce platforms that started its businesses with a focus on lower-tier city, price sensitive consumers directly through its interactive shopping experience, was among the largest contributors to both absolute and relative performance. Pinduoduo’s stronger-than-expected earnings results contributed to its stock appreciation. The company’s platform has been growing faster than peers and has also experienced continued strong momentum of delivering monetization of the business model. In contrast, consumer internet giant Tencent Holdings was the biggest detractor to relative performance due to allocation effect as the portfolio was underweight a name that outperformed.
China-specific headwinds seem to be fading with the Chinese government’s change of course on its zero-COVID policies which we believe should jumpstart for a modest re-rating of risk premia. Importantly, a low base should allow for a return to double-digit earnings growth if the renewed pragmatic policies remain in place. However, current optimism for a rebound in China should be tempered as the prospects for global growth in 2023 is looking less inspiring. In this environment, we believe domestically oriented companies in China may be better positioned to deliver growth and we remain focused on the longer-term fundamentals of the domestic growth engine.