Monthly Commentary - January 2024
Market Environment
Chinese equities were the primary weak spot among major
emerging equity markets in January. Economic data has shown steady but
lackluster improvement especially in factory output and overall consumption.
Real estate remains to the biggest concern and Hong Kong,s announcement to
liquidate the Evergrande Group,s offshore assets indicate that there is more
clean-up necessary before confidence can be restored. While stimulus measures
from China over the last several months have been lackluster, we expect additional
stimulus to stabilize market sentiment and capital flows. Earnings expectations
coming into 2024 are over-baked as analysts still expect blended 12-month
earnings growth of 15-17%. However, even if analyst EPS growth expectations are
discounted, valuations incorporate significant geopolitical and policy risks
such that any positive news could be a catalyst for an upside surprise.
Performance Contributors and Detractors
For the month ended January
31, 2024, China Fund, Inc. returned -10.73% while its benchmark, the MSCI China
All Shares Index, returned -9.94%. From a sector perspective, information
technology, health care and materials were the top contributors to relative performance
while industrials, financials and consumer staples detracted the most during
the month.
Turning to individual holdings, Tencent Music
Entertainment Group, the largest music streaming service entity in China, was among
the top performers. We think the market is coming to terms with the steady
decline of its social entertainment business being offset by what is a growing
willingness of consumers to pay for music streaming services. Music services in
China have an opportunity to realize higher profitability than global peers
such as Spotify, in our view, because the top labels in China account for a
smaller share of music streaming traffic and therefore don,t have as much
bargaining power in China as they do in the West. Conversely, JD.com was the
biggest detractor. The e-commerce platform has generated concerns overs its
growth prospects and has been weighed down by China,s muted recovery. While
internet platform companies, valuations have pulled back considerably, we
believe they largely remain profitable and scale-oriented businesses.
Outlook
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 should ultimately pay off if
the market turns. We intend to stick to our knitting and aim to deliver
consistent growth-at-a reasonable price strategy for our clients.