Market Review
The benchmark MSCI China index declined -0.8% in Euros during the first quarter of the calendar year. Emerging markets have trended down together with developed country equity markets, China-linked equities have done slightly better.
For European investors investing in Asia, the strength of the Euro against global currencies remains a headwind also in 2018 so far.
NESTOR portfolio companies saw a positive trend in revenue and earnings announcement for either the second half of 2017 or the final quarter of the year. Many Hong Kong holdings issued positive profit alerts.
Performance Review
The NESTOR China fund is now ahead of its benchmark for the financial year 2017/2018, following strength in thematic investments in the fund, and weakness in technology stocks and index heavyweights.
The strongest contributions in the NESTOR China fund came from thematic investments in healthcare & ageing, most notably China Traditional Chinese Medicine, which is seeing its long-term strategic value finally recognized by the market. Detractors were primarily exporter names amid the US rhetoric on trade and fears of input price increases.
Outlook and Strategy
Three major events are shaping China allocations currently. Firstly, certain stocks are seen to benefit from Xi Jinping’s tightening grip on power, symbolized by the removal of term limits. Secondly, investors are reassessing their overweights in technology stocks amid high valuations and increased political scrutiny. Thirdly and most prominently, the exchanges between China and the US on global trade are creating share price opportunities for active investors.
The NESTOR China funds are mindful of these important market shifts, and remain long-term allocated in thematic exposures. The healthcare and environmental allocations are very much in keeping with Xi Jinping’s outlined priorities. The existing NESTOR China fund strategy generally emphasizes domestic demand themes, and thus shows little direct fundamental exposure to global trade.