Monthly Commentary - February 28, 2023
Market Environment
Chinese equities posted some of the weakest results within global markets in February as U.S. – China bilateral tensions escalated with speculation of ‘spy-balloons’ and worries that China may try to funnel lethal weapons to Russia. Additionally, some profit taking in Chinese equities was expected given they have been some of the best performing assets worldwide since the ‘end of Covid restrictions’ announcement last November. A further rally in prices will be tempered with some skepticism as market players weigh a rebound in China against the slowdown in other major economies and a tightening global monetary environment.
Performance Contributors and Detractors
For the month ending February 28, 2023, China Fund, Inc. returned -12.12% while its benchmark, the MSCI China All Shares Index, returned -7.82%. From a sector perspective, stock selection and allocation within consumer discretionary and real estate sectors detracted the most to relative performance. On the other hand, the portfolio’s under allocation to the communications sector detracted the least from from performance.
Turning to individual holdings, internet platform companies such as JD.com, Meituan and Alibaba Group Holdings all corrected down in the month of February, following the confluence of bad macroeconomic and geopolitical news. These are well held names in global portfolios and a risk off appetite towards China led to a selloff in these names given likely global portfolio risk off appetites in China.
Conversely, opportunities in localization plays such as Shenzhen New Industries Biomedical Engineering did well in February as the market positively viewed these opportunities given rising geopolitical tensions. Shenzhen New Industries, an in vitro diagnostics (IVD) equipment and reagent provider, was the top contributor to performance. The company's products facilitate lab testing efforts in China's hospitals and pharmaceutical industries.
Outlook
China-specific headwinds seem to be fading with the Chinese government’s change of course on its zero-COVID policies which we believe should jumpstart for a modest re-rating of risk premia. Importantly, a low base should allow for a return to double-digit earnings growth if the renewed pragmatic policies remain in place. However, current optimism for a rebound in China should be tempered as the prospects for global growth in 2023 is looking less inspiring. In this environment, we believe domestically oriented companies in China may be better positioned to deliver growth and we remain focused on the longer-term fundamentals of the domestic growth engine.