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Insight on Mandatory Provident Fund – April 2018

In March, volatility returned to the market as investors woke up to the prospects of a faster pace of rate hike and a potential US-China trade war.  Although escalating Sino-US trade tension disrupted market, the implication of tariffs on China’s economic growth is expected to be insignificant.  If the proposed tariff on US$50 billion worth of imports from China goes through, Chinese exports to America would decrease by 1.6%, equivalent to just 0.4% of total Chinese exports, reducing growth in GDP by 0.06 of a percentage point.  Even if Trump follows up with his latest threat to extend tariffs to cover an additional US$100 billion worth of Chinese goods, the impact would still be a small fraction of a percentage point of growth.

Meanwhile, political stability and strong corporate earnings in China continue to serve as buffers to the recent volatility.  As the 13th National People’s Congress (NPC) held in March endorsed the removal of presidential term limit, President Xi Jinping has succeeded in further consolidating power, allowing him more time to push through reforms.  Earnings strength is another bulwark against volatilities.  Of the Chinese companies that have announced earnings so far, around 42%1 have beaten consensus earnings estimates, higher than the 28% in Asia, evidencing the strong fundamentals in the China market.

As investors worried about the global economic outlook amid the US rate hike and a potential Sino-US trade war, there were some profit-taking after result announcement during the month even though some companies reported better-than-expected results.

MPF portfolio strategy highlights:
  • White liquor sector – as sales stayed strong in the beginning of the year and we believe consumption upgrade remains a structural trend in China
  • Chinese banking stocks – we see continuous improvement on Chinese banks’ margin and asset quality, and their valuations are still at an attractive level
  • Hong Kong insurance sector – we increased weighting in a Hong Kong insurance company as its Chinese business remained strong.  China further opening up the insurance market to foreigners should also benefit the company
  • Technology stocks – we have added some technology stocks as the destocking process in the smartphone segment nears an end. However, we are very selective in picking tech stocks which have the potential to expand product portfolio and client base to gain market share, as the overall sector growth appears to be modest
  • Chinese consumption stocks – within this sector, we favor the US-listed ADRs with good growth potential and relatively reasonable valuation

We are cautious about the following sectors:

  • We have trimmed exposure to the Chinese insurance sector as premium sales were disappointing in the first few months of the year after some regulation changes.  This weak sales momentum is expected to persist in the next couple of months
  • We also trimmed some exposure to telecom stocks as government policies continue to bias towards tariff cut
  • Reduced our exposure in Hong Kong banking stocks due to the lack of catalysts that can drive share price growth in the sector in 2018.

Looking ahead, we expect the Sino-US trade tension to hinder near-term market sentiment as negotiation continues.  At the current stage, the trade dispute should weigh less on the sectors driven by China’s domestic consumption, such as consumer sectors, than sectors having a strong reliance on export.  This favors our portfolio positioning in the China market, which is currently trading at 12.5 times price-to-earnings, a still compelling level in historical standard.

 

1. Source: HSBC Global Research report

Performance data is net of all fees. Investment involves risk. The price of units may go down as well as up and past performance is not indicative of future results.  Investors should read their own mandate for details. Individual stock performance is not indicative of fund performance.

The views expressed are the views of Value Partners Limited only and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.