Monthly Commentary - April 30, 2023
Market Environment
Chinese equities turned lower in April as investors remained skeptical on the longevity and fortitude of China’s economic recovery and lingering U.S. – China tensions. Optimism surrounding valuations, especially within the tech heavy IT, communication services and discretionary sectors reversed course leading to a large sell-off in mega-cap platform companies. Although local A-share listed companies outperformed slightly, it was the foreign-listed, large index names which weakened most in April. Sector dispersion was significant within the MSCI China Index. Consumer discretionary and communication services were down over 10% each in April while energy and financial stocks were up over 8% and 4%, respectively.
Performance Contributors and Detractors
For the month ending April 30, 2023, China Fund, Inc. returned -6.41% while its benchmark, the MSCI China All Shares Index, returned -3.87%. From a sector perspective, the portfolio’s allocation to consumer discretionary and stock selection within real estate detracted the most from relative performance. On the other hand, allocation and stock selection within information technology and allocation to communication services contributed the most to relative performance.
Turning to individual holdings, a top contributor to the portfolio’s absolute and relative performance was NAURA Technology Group, a leading domestic manufacturer of semiconductor equipment, selling to a diverse range of clients including foundries and LED manufacturers. The company benefits from the trend towards its clients looking for more local supply chain providers. With a relatively small market share, the company has an opportunity to ramp up quickly and an ability to scale up.
On the other hand, JD.com, China’s leading e-Commerce platform company known for its authentic products as well as fast and efficient product delivery and Alibaba, the largest e-commerce platform in China with enterprise services such as cloud computing were the weakest performers. Both companies corrected down following the confluence of macroeconomic and geopolitical news. These are well held names in global portfolios and a risk off appetite towards China led to a selloff in these names given likely global portfolio risk off appetites in China.
Outlook
China’s reopening continues to be bumpy with some sectors such as consumer discretionary and communication services (advertising) recovering ahead of others. We continue to monitor China’s property market developments as this is key in ensuring growth stability within the country. So far, a gradual, slightly better-than-expected property sector recovery has been seen on the ground. Industrial sector recovery has been weighed down by underperformance in the renewables sectors (EV/solar/wind) so far. We feel that investor sentiment has been overly bearish on concerns about slowing demand and oversupply. This continues to be a secular opportunity for growth and is key in China’s carbon neutrality transition. Platform companies in China continue to experience market sentiment volatility given varying geopolitical reactions. However, valuations are cheap, and any signs of warmer sentiment benefits a recovery in the stock prices of these platform companies more meaningfully.