Monthly Commentary - June 2024
Market Environment
China's market performed well in the
second quarter, helped by positive sentiment generated by government
initiatives to support the real estate sector and strong exports which compensated
for lackluster domestic consumption. The government's move to enable provinces
to buy real estate inventory from developers and use it for social housing has
been notable as it should begin to take the stress off developers' balance
sheets and provide a meaningful tailwind. That said, China remains an economy
with many challenges and macro indicators remained mixed. On the retail side
there has been improvement, but overall consumer sentiment is still quite weak.
In the quarter, we focused on companies that are producing better earnings. In
large sectors, like digital and e-commerce companies, there have been
improvements on the revenue side. More generally, margins are starting to
widen, and some companies are making narrower losses in some of their higher
growth areas.
Performance
Contributors and Detractors
For the month ended
June 30, 2024, China Fund, Inc. returned -5.77% while its benchmark, the MSCI
China All Shares Index, returned -2.41%. From a sector perspective, the top
three contributors to relative performance, on a sector basis, were health
care, energy and materials due to stock selection. The top three
detractors were industrials, real estate and consumer discretionary due to
stock selection. Turning to individual holdings, among the largest contributors to absolute performance during the month was
China Construction Bank which employs a prudent approach and commands
good asset quality which did well as defensive, value trade
in China did well during the market correction. On the other hand, KE Holdings,
China's leading online real estate platform, was among the weakest performers.
Property market-related names saw a volatile second quarter performance. In the
month of June, property stocks sold off after posting strong performance in May
given continued weak numbers announced.
Outlook
China
continues to face several economic and external headwinds; however, we see
opportunities in stocks that are improving earnings and in companies with
robust dividend yield support and share buybacks. While there might be
moderate catalysts for growth on the macro front, in our view there is unlikely
to be a big fiscal or monetary stimulus for the economy as such moves in the
past have left China with large debt burdens.In terms of
geopolitics, and particularly related to the upcoming U.S. presidential
election, we think a lot of expectations are priced into the markets but there
will likely be volatility as signals emerge over the potential winner. It could
be that the election provides an opportunity to reduce positions in China or,
as we near the election, valuations in China equities may decline and the
market may overreact to the election outcome, in which case there could be
opportunities to increase exposure.