Monthly Commentary - December 31, 2022
Market Environment
Chinese equities performed reasonably well in December. Earlier in the month, the Chinese government formally announced the upcoming roll-back of various COVID restrictions, spurring speculation of a forthcoming increase in consumer discretionary activity and overall mobility. The easing of COVID policy combined with the previously announced property market support and the progress related to ADR listed company audits all contributed to positive market sentiment.
Performance Contributors and Detractors
For the month ending December 31, 2022, China Fund, Inc. returned 2.20% while its benchmark, the MSCI China All Shares Index, returned 4.03%. From a sector perspective, stock selection within the health care sector and the portfolio’s zero exposure to the energy sector contributed the most to relative performance. On the other hand, the portfolio’s allocation and stock selection within the real estate and consumer discretionary detracted the most from performance.
Turning to individual holdings, Bilibili, a platform company in China that is known to have a business model most similar to that of Youtube in the country, contributed the most to performance. Despite heavy competition, Bilibili continues to gain users and demonstrate positive user engagement trends. Compared to the rest of the platform peer group, the company was a laggard given its lower focus on profitability. However, in the most recent results, management decided to focus on monetization efforts, spurring market confidence in the stock. In contrast, KE Holdings, a real estate digital platform provider that offers listing information as well as a full suite of realty services, detracted from performance. The stock recovered in the fourth quarter given warmer real estate sentiment but corrected in December due to concerns about commission rate caps in the industry. We still see this as the best digital real estate network in China. Our view is that the longer-term value proposition that KE Holdings must deliver is the efficiency of its platform in helping customers identify and transact in the real estate market.
Outlook
Looking ahead, China’s reopening will unfortunately be messy and the road to recovery will not be a smooth one. However, the overall direction of recovery remains clear and Portfolio Managers expect much of the COVID-related disruptions endured in 2022 to be behind. Global economic outlook looks increasingly uncertain as the US. continues to slow, and Europe’s economic outlook continues to look fragile. In this environment, China will have to depend ever more on its internal growth engine for recovery, which could be a challenge pending more encouraging signs of recovery on the property, consumption and industrial output fronts, but we are cautiously optimistic that China can navigate through these challenges. Valuations wise, the Hong Kong market has rebounded, with positive stock performance in the fourth quarter of 2022, bolstered by end-of-COVID optimism. The A-share market, however, has not quite reacted to much of the good news surrounding COVID relaxation. Coupled with valuations that are now more attractive, the A-share market stands to benefit from positive catalysts this year and in the portfolio managers’ views, is well positioned for an improvement in 2023.