Monthly Commentary - January 2024

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, 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.

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.