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Chindia Equity Fund - September 2017


  • Chinese market expectations point towards export growth momentum continuing in the near term and contribute positively to real GDP growth
  • Early indications suggest GST’s impact has been positive
  • Attention in China turns towards the upcoming 19th Congress of the Communist Party of China

Market update

Chinese export growth inched down to 7.2% year on year (YOY) from 11.3% in June. Meanwhile import growth declined to 11.0% YOY from 17.2%. The overall trade surplus increased to US$46.7bn from US$42.8bn in June. While headline export growth moderated from the high levels recorded in June, it still remained solid, illustrating the continued support, albeit modest, of the global recovery. Elsewhere, July CPI and PPI inflation remained pretty much unchanged at 1.4% and 2.1% respectively YOY.

The moderation in China’s export growth in July was mainly due to weaker machinery and equipment exports. On the other hand, export growth of labour-intensive products such as clothing, footwear and textiles remained largely unchanged. Chinese export growth to the US, EU and Korea all fell while that to ASEAN picked up. Slowing import growth was primarily due to weaker commodity import growth on the back of lower commodity price inflation, while that of capital goods improved slightly. Looking ahead, consensus market expectations point towards export growth momentum continuing in the near term and contribute positively to real GDP growth. Conversely, import growth may moderate in the coming quarters on potential weaker investment demand dynamics due to tightened financial conditions.

In India, The Reserve Bank of India (RBI) voted to cut interest rates by 25bps at the outset of the month, bringing the repo rate to 6%, its lowest level since September 2010.  This cut was made as they await the impact of factors such as the recent introduction of a Goods and Services Tax (GST) and the monsoon.

Early indications are that GST’s impact has been positive and the late June/early July inventory issues have been ironed out.  GST will be inherently positive for Indian trade in the years to come and is another stepping stone in Modi’s push to reduce corruption while enhancing tax revenues and the fiscal strength of the country.

Fund activity

In China, our proprietary market timing model, which seeks to evaluate underlying equity market investment conditions, remained steadfast at a reading of +60 throughout August, indicating a bullish return to risk environment. This despite the North Korea geopolitical fracas that erupted in the early part of the month, leading to a temporary global “risk-off” trade. At the country level, our positioning translated to a healthy overweight capital allocation to China, which served strategy well.  Sector allocation within China reflected significant overweight positions to real estate and materials stocks and significant underweight positions to technology stocks, relative to the MSCI China index. In terms of contribution to returns, China delivered good alpha during June, primarily led by stock selection. Property, technology and materials stocks were the standout net positive contributors on the month, while financials stocks detracted from performance.

Following a strong month in July where Indian indices hit all-time highs, August gave back some returns.  The Fund’s overweight positions to consumer discretionary and real estate stocks contributed positively to the performance.  However the underweight to the energy sector, especially oil marketing companies, and profit-booking in a couple of the stronger performing financial stocks held back the returns on the month.

The IPO market has continued to deliver fresh capital to the markets, with domestic investors selectively participating in the new issues, as well as injections of foreign flow.  The Fund participated in an IPO for Security and Intelligence Services (SIS), India’s largest security services company. SIS has operations across India, as well as a secondary business in Australia following its acquisition of Chubb Security in 2008. Security needs globally are increasing, and SIS is well positioned to benefit from this growing requirement across a host of sectors and geographies. No other trading took place during the month.


In China, attention over the coming months will turn towards the upcoming 19th Congress of the Communist Party of China (CPC). Since the 18th CPC in 2012, the Party has managed to greatly strengthen its grip over the military, public security, ideology and economic resources. Unity within the Party has also been greatly strengthened. The Party’s political platform, the Chinese Dream, calls for national pride and personal well-being. As such, we can anticipate a few major themes to build during the next few years, namely financial crisis prevention, big government and China’s global influence. Our model indicators remain bullish and we are positioned accordingly.

In India, GST and the first data since its 1 July 2017 introduction was perhaps the most highly anticipated set of data during August and it has pleasantly surprised.  Inventory re-stocking began in earnest in early July and filings of around 65% were ahead of expectations at this early stage. The RBI cut was welcomed by most, although some market watchers had hoped for 50bps. However, we believe that the more cautious approach by the monetary policy committee is the most sensible way forward as we near the end of the monsoon season and the full impact of GST.  Inflation, particularly food price inflation is a sensitive matter so the RBI and the government are aware of the implications if the economy is allowed to overheat too quickly.

Domestic investor inflows continued into the equity markets while global events have seen foreign flows ease more recently.  Year to date, US$10.7bn has been invested domestically, exceeding 2016 full year figures of US$7.1bn, while foreign flows of US$6.9bn exceed the full year cumulative flows of 2015 and 2016.

Growth and earnings were a disappointment once all the results had been reported. However, given this was a quarter that many companies were destocking ahead of the uncertainty of GST, we believe that the coming quarters, and the second half of the financial year will demonstrate an improvement in earnings and consequently a better GDP data point in due course.  In fact, a growing number of CEOs have indicated an increasingly positive sentiment towards the upcoming quarters.