Insight on Mandatory Provident Fund – October 2018
The ongoing saga between the US and China escalated in September, with the latest round of “tariff exchange” leading to the US threatening to slap additional duties on US$267 billion of Chinese exports if China retaliates. Markets were hit by the ongoing dispute and it is worth highlighting that the scope of the trade war is beginning to widen, with US$78 billion of Chinese consumer goods targeted by the latest round of tariffs. In comparison, only US$3.7 billion of Chinese consumer goods had duties imposed on them by the US in July.
Consequently, stateside consumers could soon be feeling the pinch from the duties imposed on Chinese consumer goods. This could lead to wider repercussions as the higher inflationary pressure could prompt the Fed to quicken the pace of rate hikes. Meanwhile, China has launched a number of support policies such as a 1% cut in RRR, which is expected to inject RMB1.2 trillion of liquidity into the system. Combined with measures to promote infrastructure spending and domestic consumption, it is clear that the Chinese authorities are adopting a more flexible policy approach that is dependent on macroeconomic data.
In the midst of all the geo-political uncertainties and emerging market volatility, Value Partners believes China’s GDP growth will moderate further next year. The current earnings consensus may, therefore, still have room to be revised downwards. Meanwhile, the MSCI China Index’s 12-month forward P/E ratio of 11.1x is trading just slightly below its 10-year average. We remain cautious towards the Greater China markets in the short-term.
Despite the market stabilizing in September, the investment sentiment remained weak in HK/China markets due to the escalating trade dispute between the US and China. During the month, the MPF portfolio increased by 0.23%, while its reference index dropped by 0.11%. The portfolio’s holdings in the white liquor and insurance sectors rebounded as a result of valuations bottoming out and fundamentals not being as bad as what the market predicted. In particular, the we have been increasing its exposure to the insurance sector over the past two months due to an expected recovery in insurance premium sales. On the flip side, the Macau gaming and technology sectors were the key detractors in terms of performance, as their respective outlooks remained opaque amid the slowing domestic economy.
Looking ahead, Value Partners is maintaining a conservative near-term view of the Hong Kong and China markets, and will continue to keep a relatively high cash-level. We hope to take advantage of the potential value opportunities emerging and gradually accumulate quality names in the coming quarter. Meanwhile, we have increased the weightings of some defensive positions such as those in the infrastructure sector, as the Central government is expected to put forward more infrastructure projects to support its slowing economy.
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.