Market Review
The benchmark MSCI China rose +6.8% during the third quarter of the year, resulting in positive market performance for the calendar year.
Naturally, Covid-19 remains a significant driver of short-term economic performance. China (along with Vietnam and Taiwan) is leading the world, with hopes to return to a normal growth path next year, while most other countries are predicted to operate below their potential well beyond this year.
Several activity indicators in China are up year-on-year, such as traffic congestion, and there have not been any new domestic spread virus cases since August. But not all is yet well. The week-long “Golden Week” holiday was lauded as evidence of China’s return to normal, and control of the virus, with 637 million recorded visits to tourist attractions. Missing from the positive headlines in the press is that this figure still represents a 21% decline in volume and a 30% decline in tourism revenue compared to last year.
Performance Review
The fund was not sufficiently well exposed to the dominant theme driving public market performance around the world this year, internet and technology names. A major example would be the rally in the global semiconductor supply chain, and e-commerce, both heavily present in the benchmark. While we own key names like Alibaba and Tencent, we did not own them in sufficient size this quarter to keep up with a very one-sided public equity market. Performance was further impacted by too defensive positioning.
Outlook and Strategy
At the end of September, China’s largest property developer Evergrande, owned by China’s richest man Hui Ka Yan, reportedly asked the provincial government in Guangdong for assistance in managing a liquidity crunch. This brought to the fore one of the key concerns for China investors, the importance and fragility of the construction-led property market. Evergrande has debt obligations outstanding of more than $120bn.
Our current observation is that this is mainly a symptom of over-indebtedness at property developers, rather than the beginning of a meltdown. The overall property market still looks remarkably healthy, property sales and prices are showing year-on-year growth again. Even though this would have been an easy way out, the government has chosen to curtail, rather than stimulate, growth in the property sector to avoid a speculative bubble. Slowing new property starts have to be seen in this context. It is critical policymakers get this right as the real estate and construction sectors contribute around 13% of total GDP, and around a quarter once indirect linkages are taken into account.
Overall credit growth in China has continued to accelerate, and this should provide a positive backdrop not only for the new but also the old economy.
The fund’s strategy remains to be exposed to longer-term thematic selections, and is currently invested in stocks targeting the continued growth in online services, renewable energy and energy infrastructure, education, and China’s manufacturers retooling and reshoring.
Florian Weidinger, Hansabay