May was another eventful month because of a series of political events surrounding US trade policies, the North Korea summit and rising populism in Italy. Market sentiments remained mixed as the trade dispute between the US and China continued to heat up and trade talks between the two countries failed to yield a breakthrough. On the other hand, China’s onshore credit market also came under pressure as tightening liquidity conditions triggered a wave of corporate debt defaults, which further weighed on investor sentiment in China’s onshore A-share market.
Despite the anaemic sentiment, strong corporate fundamentals continued to support the market. Upstream sectors such as oil and gas benefited from the recovery in commodity prices and witnessed the greatest amount of margin expansion since 2014 in April. Other sectors such as healthcare continued to paint a positive earnings outlook, which has been gaining market attention since the start of this year, while technology names, in particular sector leaders, also witnessed a share price recovery after having corrected in recent months.
MPF portfolio strategy highlights:
- Technology stocks – we have invested into selective names, especially those operate along the smartphone supply chain, as recent sales data suggested that the industry might have hit bottom in China. The sector’s valuation looked attractive after having consolidated in the past few months.
- Chinese consumption stocks – we continued to favor stocks that benefit from China’s consumption upgrade cycle in view of the structural trend of increasing personal per capita income. Beneficiaries included the white liquor as well as the food and beverage sectors.
- Chinese e-commerce stocks – we expect the growth outlook of this segment to remain solid in the medium to long term.
Looking ahead, we maintain our view that US trade policy will present a drag on market sentiment in the near term but we expect future rounds of negotiations to provide more clarity on the US-China trade dispute and to ease pressure on the market. The valuations of the China market have become more attractive after the mild retreats in recent months. The current 12-month forward price-to-earnings (P/E) ratio of the MSCI China Index is 12.7 times, which is not demanding as the trend of upward earnings revisions remains intact (year to date, the MSCI China Index’s 2018 EPS growth revised up by 1.3% to 15.7%1). We continue to see the prevailing volatility as buy-on-dip opportunities for long-term value investors.
1. Source: Goldman Sachs Research
^Reference index refers to FTSE MPF HK Index before 1 October 2015, and FTSE MPF Greater China Index starting from 1 October 2015.
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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.