Monthly Commentary - May 2024
Market Environment
Chinese equities ended May in positive territory as the government announced policies to support both the demand and supply side of the country's struggling property market. On the demand side, the minimum required downpayment was lowered to increase affordability along with a cut in mortgage rates. On the supply side, the central government called on local governments to purchase unsold properties to reduce inventory and add to the affordable housing stockpile. Early May optimism was also lifted by somewhat robust trade data and Chinese willingness to travel during the May holidays. However, later in May, other economic data, such as manufacturing PMI was less convincing that China's economic turnaround is on solid footing.
Performance Contributors and Detractors
For the month ended May 31, 2024, China Fund, Inc. returned 1.96% while its benchmark, the MSCI China All Shares Index, returned 1.19%. From a sector perspective, the top three contributors to relative performance were consumer discretionary, real estate and communication services. On the other hand, the largest detractors were industrials, information technology and utilities. Turning to individual holdings, among the largest contributors to absolute performance during the month was KE Holdings, China's leading online real estate platform company. KE Holdings did well on resumed optimism around property market given continued news flow on relaxation measures. On the other hand, Shanghai International Airport were among the detractors given weaker-than-expected recovery in duty-free spending in part due to lower concession rates and weaker consumption patterns. The airport will also be commencing on expansion plans which will increase its capital requirements over the next few years.
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.