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Chindia Equity Fund - October 2017


  • In China, economic data came in shy of expectations due partly to policy tightening and environmental issues.
  • We continue to make the distinction between investors on our views for China and how we allocate capital and manage risk. Currently, we remain bullish and are positioned accordingly, with overweight allocations to cyclical sectors.
  • Turning to India, October began with the Reserve Bank of India (RBI) announcing to keep interest rates on hold, while continuing to monitor closely the inflation pressures rising in some parts of the economy. 

Market update

In China, August economic activity indicators registered a broad-based deceleration, with most major indicators suggesting that aggregate analyst expectations were a little on the optimistic side. Industrial production growth (IP) growth declined to 6.0% year on year (YOY) in August against 6.4% in July. By sector, mining and utility IP growth declined to -3.4% and 8.7% YOY in August from -1.3% and 9.8% in July respectively, while manufacturing IP growth edged up to 6.9% YOY from 6.7% in July. Retail sales growth decelerated to 10.1% YOY in August from 10.4% in July. Meanwhile, online retail sales growth edged up to 34.3% YOY in August 2017 from 33.7% for July 2017. Finally, headline fixed asset investment (FAI) growth moderated to 7.8% YOY in August from 8.3% in July.

The reason for the negative data surprise may be due to earlier financial condition tightening practices undertaken by Beijing over the twelve months, in addition to recent heavy industry production suspension initiated by environmental inspections. A new government decree banning almost all construction activity in Beijing and Tianjin between October and March has recently been proclaimed, highlighting the stepped up commitment of the central government to the anti-pollution campaign. A report of the results of the recently completed nationwide environmental inspections in the China Daily this month indicated that a total of almost 6,000 officials have been held accountable for inadequate environmental protection, according to the Ministry of Environmental Protection.

India’s 50 stock Nifty Index reached new highs mid-month before profit-booking took the markets slightly lower into the quarter end.  The strength of domestic buyers of equities remains in place, with continued appetite for the initial public offerings diverting some liquidity from established listings, which could be one reason for the market not pushing on further at this juncture.

The latest growth figures from around Asia have impacted India from a foreign investment perspective, with some investors choosing to sit on the sidelines.  We would argue that India’s current growth data is largely an effect from the demonetisation announcement of late 2016, coupled with the introduction of the Goods and Services Tax (GST) in July 2017.  It is to be expected that both decisions would have near-term implications for growth, however India’s future growth trajectory remains firmly on the path of consistently being the fastest growing major economy.

Fund activity

In China, our proprietary market timing model (MTM), which seeks to evaluate underlying equity market investment conditions, remained steadfast at a reading of +60 throughout the course of September, indicating a bullish return to risk environment. The model reading held firm despite President Trump reigniting US/North Korea geopolitical tensions mid-month that led to a temporary global ’’risk-off’ trade. At the country level, our positioning translated to a maximum overweight capital allocation to China, maximum underweight allocation to India which served strategy well.  Sector allocation within China reflected significant overweight positions to real estate, materials and energy stocks and significant underweight positions to technology stocks, relative to the MSCI China index. In terms of contribution to returns, China delivered good fund alpha during June, with property and materials stocks were the standout net positive contributors during a month in which almost all China positions generated respectable alpha.

In India, we purchased an initial position in Sun TV Networks, a stock that we have been closely tracking for some time.  Sun TV is south India’s largest broadcaster, with more than 30 channels across four languages.  The greatest opportunity for the company is the push to digital TV access in the state of Tamil Nadu.  Previous hurdles are being taken down, with Sun TV expected to be a primary beneficiary of the move to digital TV in the region.  In addition, recent exclusivity deals with prime content producers, combined with a strong movie library and growing ad revenues make the stock increasingly attractive.


Looking ahead in China, it is reasonable to expect real demand growth, notably investment, to soften modestly as a consequence of the tighter financial conditions that have been prevalent since 3Q 2016. On the other hand, still firm external demand and policymakers’ emphasis on growth stability ahead of the 19th National Congress of the Communist Party of China (CPC) should provide a substantial buffer against potential downside shocks to the country’s macroeconomic stability.

As always, the managers continue to make the distinction to existing and potential new investors between our views on the outlook for China and how we allocate capital and manage risk. A 100% systematic process brings clarity and instils discipline to our decision-making framework. The first and foremost question in our minds that needs answering is what underlying market conditions are today; bullish or bearish? With that answered, we allocate capital to what we deem to be the most attractive companies that comprise the MSCI China universe at the point of investment. As of now, our model indicators remain bullish and we are positioned accordingly, with overweight allocations to cyclical sectors.

The opening week of October began with the Reserve Bank of India (RBI) announcing that it was to keep interest rates on hold, while continuing to monitor closely the inflation pressures that are rising in some parts of the economy.  Crude oil prices have become more expensive, especially so with the recent strengthening of the US dollar as India imports 75% of its oil requirement.  A slightly disappointing first harvest could also spike food prices; a large contributor to sentiment and inflation pressures across the country.

However, other parts of the economy are seeing declining pricing dynamics, and with a need to reinvigorate growth and kick start the lending cycle once more, the RBI are clearly caught in the middle of both situations, hence their neutral stance for now.