Insight on Mandatory Provident Fund – August 2018
Markets remained rocked by volatility in July as trade tensions between the U.S. and China continued to escalate and dominate headlines.
The U.S.-China trade dispute showed no signs of abating as China unleashed retaliatory measures after the Trump administration proceeded to raise tariffs on US$34 billion of Chinese imports. On 6 July, China announced similar punitive tariffs on an equal amount U.S. imports and cancelled a trade deal on energy and agricultural goods reached in June. In response, the Trump administration punched back by announcing that it would slap tariffs at a higher rate (25% vs. the initial 10%) on another US$200 billion of Chinese imports although the implementation of the tariffs is still subject to public comments. The developments are in line with our earlier expectation that the trade dispute would get worse before it gets better given Trump’s tendency to strain relationships to the limit.
While the trade dispute may potentially burden China’s growth outlook, there are signs of a shift in policy stance in China following the risk-containing measures to control liquidity that have been in place since 2017. The signs point to a more flexible approach towards the tightening measures that China has been adopting as it looked to deleverage and de-risk its financial system – and suggests appropriate easing to maintain economic stability. China’s State Council announced on 23 July that it would adopt “more proactive fiscal policy” followed by the announcement at the meeting of the Politburo – the top decision-making body of China’s ruling party – on 31 July that policymakers would strive for economic stability in China. During the month, the People’s Bank of China has also indicated that it could ease some capital requirements for commercial banks to support lending. A sharp drop in China’s 3-month Treasury deposit rate in July also underscored the more relaxed policy stance.
Value Partners maintains a conservative view of the market and thus, will continue to maintain a reasonable level of cash in our MPF portfolios. Meanwhile, we slightly increased the portfolio’s weighting in the insurance sector last month as the sector’s valuation became attractive and premium sales should begin to recover in the second half of the year. Other than this, we continued to favour the domestic consumption sector as the structural growth of this sector remains intact.
Looking ahead, we expect the market to continue to be buffeted by volatility as U.S.-China trade tensions will continue to heat up and unleash uncertainty on markets in the near term. However, we maintain our view that the two sides will eventually resolve the dispute through negotiations. On the policy front, despite policymakers continuing to strive for risk containment measures as the long-term quality growth agenda remains unchanged, it is encouraging to see that policy will be nimble to cushion the potential threat of external risks and a macro downturn. While the weakening sentiment continues to weigh on market performance, a key event in the coming month will be the interim/ Q2 earnings season. While the recent swing in the RMB exchange rate may have impacted the earnings of select companies, the consensus earnings estimate for the MSCI China Index continues to imply double-digit growth, with 16.4% growth1 expected for 2018, and reflect the still solid fundamentals of Chinese companies.
1. Source: HSBC Global Research, 30 July 2018
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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.