Monthly Commentary - July 2024

Monthly Commentary - July 2024

Market Environment 

Chinese equities were slightly negative in July. China's Third Plenum meeting in mid-July and the leadership's Politburo meetings at the end of the month captured the attention of investors hoping to hear definitive policy announcements to address weak consumer confidence and challenging real estate conditions. While the Plenum confirmed the government's commitment to achieve 5% GDP growth this year and the Politburo highlighted the need to boost consumption, neither meeting succeeded in lifting sentiment definitively higher. Politburo announcements covered five broad topics including macro policy, domestic demand, property and local government debt, the importance of the private sector and the need to boost capacity in certain industries. In terms of immediate policy implementation, most analysts expect further cuts in new and existing mortgage rates as the best policy option to stabilize property and boost consumption.

Performance Contributors and Detractors 

For the month ended June 30, 2024, China Fund, Inc. returned -1.28% while its benchmark, the MSCI China All Shares Index, returned -0.60%. From a sector perspective, the top three contributors to relative performance, on a sector basis, were consumer staples, information technology due to stock selection and utilities due to zero allocation. The top three detractors were health care, energy and consumer discretionary due to stock selection.

Turning to individual holdings, among the biggest contributors to absolute performance during the quarter was Alibaba, the largest e-commerce platform in China. The company did well given its relative defensiveness owing to a cheap valuation. Alibaba's recent plans to potentially change fees for some its merchants could increase the company's take-rates. On the other hand, PetroChina was among the largest detractor given profit-taking along with recent oil price correction. PetroChina has done well on the back of the state-owned enterprise (SOE) trade in China where blue-chip SOEs have done well amid market volatility as they have been viewed as defensive given low valuations and high dividend yields. 

Outlook  

China continues to face several economic and external headwinds; however, we see opportunities in stocks that are improving earnings and in companies with robust dividend yield support and share buybacks. While there might be moderate catalysts for growth on the macro front, in our view there is unlikely to be a big fiscal or monetary stimulus for the economy as such moves in the past have left China with large debt burdens. In terms of geopolitics, and particularly related to the upcoming U.S. presidential election, we think a lot of expectations are priced into the markets but there will likely be volatility as signals emerge over the potential winner. It could be that the election provides an opportunity to reduce positions in China or, as we near the election, valuations in China equities may decline and the market may overreact to the election outcome, in which case there could be opportunities to increase exposure.