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Chindia Equity Fund - January 2018


  • China’s Central Economic Work Conference (CEWC), the most important annual gathering of top leadership tasked with mapping out economic priorities for 2018, concluded late last month with official acknowledgement that China is largely a consumer-driven economy underpinned by the largest middle-income population in the world.
  • China’s markets internals have been leaning bullish all year following a ‘buy’ signal generated on 11 January 2017. However, of late, markets have begun to fluctuate and we have witnessed a sharp deterioration in our models, culminating in a ‘sell’ signal on 6 December.
  • Indian stock selection performance was strong during the month, driven by the long term heavyweights in discretionary, real estate and financials. Two state election victories for the ruling BJP re-enforced Modi’s grip on government, with expectations of another record budget announcement in early 2018. Built upon additional policy announcments expectations are for further positives in the Indian equity markets as we move towards a likely 2019 general election. 

Market update

The CEWC made an official acknowledgement that China is largely a consumer-driven economy underpinned by the largest middle-income population in the world. The conference also reaffirmed its roadmap for the next three years, namely the pursuit of Supply Side Reform (SSR), financial de-risking and the ‘’Beautiful China’’ campaign. Beijing appears prepared to tolerate a slower GDP growth profile, driven increasingly by consumption and investment in the new economy.

In India, elections were held in the northern Indian state of Himachal Pradesh, as well as Modi’s “home” state, Gujarat. For the first time since Independence in 1947, one party now controls 19 of the 29 Indian states with the Bharat Janata Party (BJP) topping both polls.

The major Indian indices have closed at or near all-time highs suggesting that the market continues to accept Modi’s bold reforms, underpinned by factors such as the strong demographics, the potential for change through urbanisation and the transformational impact of technology.

Farming communities, historically the bedrock of the opposition voter, will no doubt become more vocal in their unrest as we move towards the general election. As such, we expect further more populist announcements in the coming months. There have already been farm loan waivers across a number of states, while a bill has been raised in Parliament for an additional US$5bn allocated to a rural employment scheme. Job creation, housing availability and rising food price inflation will be critical issues Modi will address in the early stages of 2018. It is widely expected that the Union Budget will deliver further reforms and additional measures to ensure the BJP gains greater control of the Upper House to push onwards with its plans for India. 

Fund activity

China’s internals have been bullish all year following a ‘buy’ signal in January 2017. Positioning within the Fund has reflected this via a significant overweight allocation at the country level to China, funded by a significant underweight allocation to India.

Chinese exposure has been skewed towards cyclical, high beta sectors (notably auto, material and real estate stocks), generating significant alpha at the stock level. However, of late, market action has begun to fluctuate and we have witnessed a sharp deterioration in our models, culminating in a fresh ‘sell’ signal on 6 December.

The model suggests China’s short-term equity market prospects are far less attractive than they have been recently. In response, the managers have reduced China to a significant underweight country allocation through a combination of equity sales as well as three and four month put options. 

The alignment of the Fund following the sell signal in China has led to topping up of Indian positions. Additions were made in the industries more closely aligned with the government’s recent announcements such as the recapitalisation of public sector banks and the infrastructure capital injection.  We also brought in a new stock, Security & Intelligence Services India which was listed earlier in 2017. It is India’s largest security services company with 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.


As Beijing continues to attempt a controlled slowdown of China’s economy in 2018, growth will likely be driven by two primary engines, strong consumption and resilient exports. Potential headwinds next year are a property slowdown, increasing financial regulation and the anti-pollution campaign. The result should place official growth in the realm of 6.3-6.5%, comfortable enough to allow Beijing to maintain ongoing de-risking measures. Another factor worth watching is potential upside squeeze in labour costs which could stoke inflationary pressures.

As India nears the 2019 general election we expect Prime Minister Modi to forge ahead with delivering further reforms and taking measures to secure re-election. Housing, infrastructure and power generation are areas in which Modi can create the necessary jobs to ease the path to a second tenure as PM. The Fund is positioned to take advantage of these drivers of growth in the coming quarters, with allocations to industrials, consumer discretionary and financial stocks.

India remains at the upper end in valuation terms, and continues to trade at a premium. The long-term credentials, strong leadership and the aforementioned underlying factors are all reasons to consider the premium acceptable for India. Earnings have been held back through the bold reforms such as demonetisation and the introduction of the Goods and Services Tax (GST), however these events have been more fully integrated, and thus the market will look forward at the supportive measure the government will be undertaking.

2017 started with much debate around Modi’s credibility following the November 2016 announcement of demonetisation, and issues surrounding the introduction of GST. However at the end of the year we have Indian markets at all-time highs primarily based on the return of the domestic Indian investor. The two recent state election victories have set the government on its road to re-election in 2019, and we can expect Modi to tackle areas of weakness in the coming months, hence we remain positive on Indian equities into the New Year.