Monthly Commentary - April 2024
Market Environment
Emerging markets and Asian equities were mixed but slightly higher in April. China was a notable bright spot as Chinese equities rebounded sharply in April outperforming most major market globally. Chinese leadership met on April 30 for a mid-year review of the “economic roadmap for 2024” which markets interpreted positively in hopes that economic policy would remain a priority for the government. Although policy statements regarding property fell slightly short of market expectations, the government seems intent to address the overhang in inventory and lackluster demand.
Performance Contributors and Detractors
For the month ended April 30, 3024, China Fund, Inc. returned 5.06% while its benchmark, the MSCI China All Shares Index, returned 4.76%. From a sector perspective, the top three contributors to relative performance were industrials, real estate and energy due to stock selection. On the other hand, the largest detractors were consumer discretionary, financials and information technology due to stock selection. Turning to individual holdings, the largest contributor to absolute performance during the month was Tencent Holdings which contributed positively given its large weight of almost 10% in the portfolio and returning slightly over 12% over the month. Attractive valuations, coupled with steady results demonstrating better-than-expected growth recovery in its advertising business, alongside steady performance in its gaming business have led to positive returns. On the other hand, duty-free operator China Tourism Group (CTG) detracted from performance. The company's Hainan Island duty free sales (Hainan operations is the largest revenue contributor for CTG) also continue to be weak and were down -24% year-over-year on a high base and continued weakened state of the consumption environment. Thus, for its first quarter results, the company still posted revenue declines. However, CTG demonstrated profitability improvements due to increased share of higher margin offline sales and narrowed discounts in Hainan as well as positive renegotiation of rental agreements. Given the significant pull-back in valuations, and continued positive recovery of travel in China, we continue to hold onto the name.
Outlook
Looking ahead, the question remains as to whether China's equity markets are charting a sustainable path of recovery. Notwithstanding the well-known concerns, investor sentiment is improving toward China based upon perceived risk/reward. Marginal year-over-year improvement in earnings expectations combined with stock multiples trading at roughly a 50% discount to February 2021 highs is giving investors confidence that current valuations provide an adequate cushion for unforeseen risks. The calculus suggests that even with little to no improvement in sentiment or stock multiples, consensus estimates in year-over-year earnings growth could lead to attractive equity returns. Thus, we are still in a cautious frame of mind, tinged with some optimism. While last year we think Chinese government policy over promised and underachieved, this year we think the government is seeking to under promise and overachieve. One potentially destabilizing variable on our radar is geopolitics, particularly with the U.S. election approaching.