Monthly Commentary - December 2023
Market Environment
Chinese equities were the primary weak spot among major
emerging equity markets in December. Positive tones stemming from November's
APEC meetings, policy support announcements from the Central Economic Work
Conference (CEWC) and a pivot in the U.S. FED's interest rate outlook were not
enough to propel Chinese stocks higher. December PMI manufacturing and service
data straddled the line between growth and contraction and other economic
metrics like retail sales failed to exceed market expectations. Market
participants expect government stimulus to address the economy's tepid recovery
to be moderate and somewhat underwhelming which continues to dampen sentiment.
On the positive side, consensus estimates have Chinese corporate earnings
increasing mid-teens in 2024 and equity valuations are pricing in extreme
bearishness which creates opportunity for an upside surprise in stocks after
three consecutive negative years. Chinese small and mid caps ended lower but
outperformed weak large and mega caps during December.
Performance Contributors and Detractors
For the month December 31, 2023,
China Fund, Inc. returned 2.03% while its benchmark, the MSCI China All Shares
Index, returned 1.97%. From a sector perspective, consumer discretionary,
communication services and consumer staples were the top contributors to relative
performance while financials, health care and materials detracted the most during
the month.
Turning to individual holdings, Alibaba, the largest e-commerce platform in China was a top
contributor to performance. The company did well given its relative
defensiveness owing to cheap valuations. Conversely, property developer CIFI Holdings was among the biggest detractors
to performance. CIFI's stocks only resumed trading at the end of September
after a long suspension and its negative share price performance had an
accumulated impact over the time it was suspended.
Outlook
2023 has been generally a
challenging year for China. Despite the lifting of COVID restrictions in the
country, the government's lack of stimulus generally led to weakening economic
support for the rest of the year. At the same time, property market woes
continued for a prolonged period, impacting sentiment and business confidence
in the country. While more supportive measures have been rolled later in the
year to address property market concerns, a meaningful inflection remains to be
seen.
Looking ahead, we are cautiously looking for a stabilization of the
deterioration in property markets. While we do not expect a significant
warming of geo-relations, the ongoing current status quo of a more construction
post-APEC posturing would be welcomed by the market. Valuations continued to
trend down in 2023, and the broader China market hovers around similar levels
as 2009 despite better quality businesses and earnings profile. We continue to
believe that patience is needed in these market environments and that it will
ultimately pay off once the market turns. We intend to stick to our knitting
and aim to deliver consistent growth-at-a reasonable price strategy for our
clients.