Premium China (MAQ0441AU) Report & Performance

In July, the Fund was up 8.6% (in AUD), while the MSCI China Index recorded gains of 9.4% (in AUD). Year-to-date, the Fund and the index were up 2.0% and 5.4%, respectively. The Fund’s gains were broad-based across sectors. Our stock picks in leading internet players within the consumer discretionary and communication services sectors were among the top contributors to the Fund’s performance, as they were boosted by the central government’s supportive policy stance toward private enterprises and platform companies. Our exposure to the financial sector also supported the Fund’s performance, as investors added to the more traditional areas of the market to position for the potential stimulus. In particular, our holding of an insurance company continued to benefit from its new business value growth. Currency hedging was also a contributor. On the other hand, our exposure to the healthcare sector slightly dragged the Fund’s performance, particularly our holdings of a leading traditional Chinese medicine (TCM) provider and a medical equipment manufacturer, due to profit-taking activities from investors following the sector’s positive performance in recent months.

We remain constructive about our holdings as they should ride on the normalizing demand for consumer and medical products and services. In addition, we did not own some of the benchmark companies that also performed strongly alongside the market during the period, including internet- and electric vehicle-related names, leading to a drag on the Fund’s relative performance. That said, we remain selective in these areas and have more conviction in our current holdings, as we view them to have better long-term earnings visibility and risk-reward profiles.

In June, the Fund was up 1.3% (in AUD), while the MSCI China Index recorded gains of 1.1% (in AUD). Year-to-date, the Fund and the index were down -6.1% and -3.7%, respectively.

The top contributors to the Fund’s performance include select internet names in the consumer discretionary and communication services sectors, as they are expected to maintain revenue growth ahead despite the short-term bumpiness of the economy. Meanwhile, a high-quality property developer yielded positively despite the ailing property market, as it delivered stronger sales growth relative to its peers and has continued to progress with the construction and delivery of its projects. A leading regional insurance company also supported the Fund, given it steady business growth outlook, especially with strong business demand associated with the resumption of mainland Chinese visitors to Hong Kong.

On the other hand, our exposure to SOEs, including those in the industrials and telecommunications sector, was a key detractor to the Fund’s performance, as expectations of SOE reforms moderated during the month. Our exposure to the healthcare sector, particularly our holdings of a medical equipment manufacturer and a traditional Chinese medicine (TCM) provider, also dragged as investors took profit following the sector’s positive performance in recent months.

Although the Greater China market opened higher at the beginning of June on expectations of more policy stimulus, the optimism gradually faded as macroeconomic indicators continued to disappoint, giving up some of the earlier gains in the month.

The latest consumer price (CPI) data continued to indicate a threat of deflation, remaining at an anemic level of 0.2% YoY in May, while the decline of the producer price index (PPI) also enlarged from the previous month.1 Exports also declined in May, reversing a surprisingly positive growth in the previous two months. Within the property sector, new home sales also weakened in June. Adding to the market’s worries include the youth unemployment rate (aged 16-24) rising to a record high and the weakening renminbi relative to the US dollar.

On a positive note, the government gave signals that economic growth remains a key priority, with various easing measures to support the country’s recovery. In June, the oneand five-year loan prime rates (LPRs), which are the reference rates for corporate loans and mortgages, respectively, were cut by 10bps. That said, expectations for more sizable stimulus packages, particularly targeting the property market, have not been met.

On the geopolitical front, communications between senior officials of China and the US, including the US State Secretary Blinken’s visit to Beijing, indicate intentions of smoothening tensions. Meanwhile, Premier Li Qiang, who gave a keynote speech at the World Economic Forum, rejected the West’s increasing rhetoric of “de-risking” from China and instead called for greater global cooperation. However, although these may help prevent tensions from further escalating, we have yet to see concrete steps to ease tensions.

In March, the Fund was up 2.9% (in AUD), while the MSCI China Index was up 5.2% (in AUD).3 For the first quarter, the Fund was up 3.8% (in AUD), while the index performed 6.0% (in AUD).3

During the month, the key detractors were financial names, dragged by the weakened sentiment caused by the SVB and Credit Suisse incidents. However, we believe the impact of the recent events on the banking sector in China (as well as Asia as a whole) is rather limited. Other detractors included a major e-commerce player, which delivered a lower-than-expected set of quarterly results, and a leading solar component maker. Currency hedging was also a detractor to the Fund’s performance. On the other hand, some of our portfolio holdings continued to yield positively.

These include some internet companies, which continued to benefit from the economic recovery and the regulatory tailwinds. Our positions in some SOE companies were also boosted by expectations of further SOE reforms as well as the rapid development of industrial digitalization, especially on cloud infrastructure services.

In February, the Fund and the MSCI China Index performed -7.7% (in AUD) and -6.3% (in AUD)1 , respectively. Currency hedging was a detractor to the Fund’s performance.

The key draggers in this month are mainly leading internet companies and financial names – many of which were outperformers in the previous three months and had a strong run. We believe their corrections were primarily sentiment-driven, as there are no signs of any significant deterioration to their fundamental outlooks.

On the other hand, some of our portfolio holdings were resilient despite the broader market correction and supported our Fund. In particular, these include our exposure to Chinese telecom operators, which were boosted by expectations of further SOE reforms to bolster their shareholders’ returns and faster adoption of cloud infrastructure services. Currency hedging was also a detractor to the Fund’s performance.

We believe the market correction, which occurred after a strong and lengthy market rebound, is only temporary, and the market still hasn’t fully priced in the solid macroeconomic recovery and the corporate earnings rebound of China. The market could remain volatile in the near term as investors focus on the messages around the “Two Sessions” in China. On 5 March 2023, China disclosed the GDP growth target of “around 5%” for 2023, which is at the conservative end of the consensus forecast range of 5-6%. While this may upset some investors, we continue to hold an optimistic view of China’s stock market outlook.

In December, the Fund and the MSCI China Index were up 3.8% (in AUD) and 3.9% (in AUD)1 , respectively.

Returns were broad-based and widespread among different individual names, particularly led by companies in the consumption, financial, and internet sectors, as they were supported by expectations of reopening between Hong Kong and mainland China. The top contributors include a leading internet player, which benefited from the release of online video gaming licenses, a regional insurance company, and a leading retail bank in China.

However, their positive contributions were partly offset by the share price corrections in some other names. For example, a leading semiconductor foundry was hit by concerns of a harsher global consumer electronic downturn.

Despite some near-term pressures, we continue to believe the company offers compelling long-term value, given its unique strategic positioning and unrivalled leading position in advanced node manufacturing, which could help to preserve its business competitiveness and profitability over the long term.

We are confident that 2023 will be a year of recovery for China, and there is still large potential upside on the back of the low valuations and prospective corporate earnings upgrades. That said, we expect the road ahead to remain bumpy, especially on swift movements in some macro data points and economic events. In particular, the accelerated reopening and exit of anti-Covid controls have adversely affected near-term mobility and business activities in China and may lead to softer near-term macro readings. However, these are also expected to be followed by a robust rebound later. Overall, we remain nimble and diligent in our portfolio management, with a view to safeguarding the portfolio’s robustness. We continue to invest in high-quality companies – particularly in the consumption, financial, and technology sectors, that will ride through the volatility and thrive over time.

In November, the fund and the MSCI China Index were up 22.3% (in AUD) and 23.9% (in AUD),4 respectively.

The significant market rebound during the month was rather broad-based. All major sectors have registered positive returns, mainly led by the real estate and internet companies, as well as some consumption names that are perceived to benefit from China’s phasing out of its anti-Covid policies (i.e., reopening). These primarily reflected the renewed investor enthusiasm amid the strong funding support for property developers and the fine-tuning of anti-Covid policies in China.

For the fund’s performance, the biggest contributors include leading e-commerce players, consumer names, and financial companies. Despite macro headwinds, these companies have all reported solid results for the third quarter of this year, which showcase that our portfolio’s high-quality holdings are well-positioned toward the market turnaround.

Although market sentiment has remained buoyant in recent weeks, we anticipate share prices to remain choppy as different macro data and business activities reports are released. For one thing, property sales in China will likely remain weak in the near term, and without a meaningful pickup, it is hard to see how long the strong rally in distressed property companies could sustain. The same thought applies to some “reopening plays”, as we still foresee some back-and-forth in the loosening of anti-Covid measures, which were held for a long period, and it would take time for people to accommodate the new normal.

Looking ahead, one key event to watch is the central economic working conference that will be held in the coming few weeks, which could outline more top policy directions in China. Regarding our portfolio holdings, we continue to invest in high-quality companies that will ride through the volatility and thrive over time. We remain optimistic about China’s long-term market outlook and have strong faith that our long-held practices in diligent, thorough, deep-dive, and bottom-up research will bear fruits over the long term.