Chindia Equity Fund: February 2021

 

 

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Summary

• The FTSE Emerging Market Index returned 3.3% in the month, with the Chinese market returning 7.4% and India down 2.3%. The Chindia Fund (I class USD) returned 2.7%. 
• China ended 2020 by growing GDP 6.5% in the fourth quarter, indicating that the country has recovered rapidly from the COVID crisis.
• India’s economy is showing signs of recovery; however, the recovery is not expected to be as rapid as Chinas.

 

Market update

The FTSE Emerging Market Index returned 3.3% in the month, with the Chinese market returning 7.4% and India down 2.3%. The Chindia Fund (I class USD) returned 2.7%. Chinese markets have been particularly strong supported by positive economic data indicating that the country has returned to pre-pandemic growth rates. 

The top performing holdings during the month were Sinotruck Hong Kong (up 22.2%), Tencent (up 20.8%) and Uni President China (up 19.0%).  While the top detractors were ICICI Lombard General Insurance (-13.4%), Asian Paints (-12.8%) and Divi’s Laboratories (-12.2%).

In January, JD.com and Alibaba were trimmed and China Oriental and HDFC topped up. A new position in China Mobile was initiated.

During the month, the New York Stock Exchange flip flopped about forcing US investors to divest from Chinese telecom companies. Ultimately US investors were forced to sell these stocks in a short period of time. China Mobile’s share price consequently fell substantially, presenting an opportunity to purchase, alongside a wave of mainland Chinese investors. The company is the largest telecoms operator in China with over 60% of the mobile market and 45% of landlines. Industry reports suggest an easy competitive outlook and with a government stake in the company of 73%, we do not anticipate major regulatory change. The majority of annual return ought to come from the dividend, with the stock yielding over 7%, but trading on very low multiples we would also anticipate a rerating given an EV/EBITDA of only 1.4x and single digit PE ratio.

The recovery in China is likely to continue to be supported by the reshoring of consumer spending, the running down of excess savings accumulated during 2020 and possibly a less strained relationship with the US when it comes to trade policy. Recent outbreaks of COVID-19 are not expected to derail the recovery with some economists looking for double digit growth in the first quarter 2021. India’s recovery is lagging China’s, however it is expected that the economy will continue to pick up in the year beginning 1 April 2021 and possibly even grow double digits. The speed and efficacy of vaccine roll outs are the biggest swing factor to forecasts for economies globally. Early data from Israel and the UK suggest that vaccination programs are having the desired impacts which is a positive indication for emerging markets.