Market Review
The benchmark MSCI China index declined -6.3% in Euros during the second quarter of the calendar year.
In addition to the US-China trade war contributing to a return of the risk-on/risk-off cadence from prior years, the political situation in Hong Kong has started to impact equity market sentiment, affecting also H-shares of domestic Chinese firms. In strong contrast stands the performance of the domestic Chinese A-share market, which reacted very favourably to the prospect of Chinese policymaking stimulus.
Pork prices in China are on the rise as the number of live pigs is down more than 20% year-on-year as a result of early slaughter to prevent the spread of the most severe swine fever outbreak in recent memory. This is highly relevant for the protein & food-related themes we invest in, given knock-on effects on feed and soft commodity markets.
Performance Review
While a smidgeon ahead of the market benchmark for the quarter, we are natural disappointed by a negative absolute quarterly performance, however owing primarily to macroeconomic and political factors. NESTOR China fund lost -14.9% over the last twelve month accounting period, regrettably underperforming the benchmark’s loss of -6.7%. In the twelve months to June 2019, the largest contributors were our conviction positions AIA Group (life insurance), JD.com (e-commerce) and HK Broadband (telecom/media convergence). China Traditional Medicine (healthcare), Goodbaby (consumer), and Hopefluent (property services) were the largest losers in the portfolio.
Outlook and Strategy
Our top weighted investments in healthcare & education, and a preference for property service (vs. developers), underperformed the benchmark asymmetrically in the recent past. All three were sold down along with the benchmark and further neglected by the market when the benchmark recovered in early 2019. We do not believe that this trend is permanent. In fact on the property side, we are seeing signs that the index heavyweights in development may be coming under pressure: mainland developers underperformed this July after recent news that China will limit property financing via trust firms.
The recent improvements in Chinese manufacturing data (Caixin survey) may finally symbolize the effects of accommodative fiscal policy which together with changes in monetary policy (or at least policy expectations) would be a fertile ground for positive equity performance for Chinese firms. The government appears to have learnt from prior mistakes in aiding in a misallocation of capital: the current set of interventions was well timed and target, but much more measured, with fiscal easing of around 2% of GDP, half the level of the 2015/2016 stimulus.
We are once more prepared for macroeconomic volatility. It has become however increasingly clear that the US-China trade war is much less about trade and more about the US seeking various avenues for the containment of China. In combination with the fight over Huawei’s market access, any renewed escalation of the US-China (trade) war, will create significant spill-overs into technology equities. Several multinationals have indicated plans to relocate production out of China, moving for example to Vietnam, Thailand, Malaysia or Bangladesh. There will inevitably by economic costs to China from these developments. The upside of a thematic strategy is there is always something to do as usually some of the many attractive long-term business models we follow experience price movements. But it does take patience.