Summary

• The latest Chinese macroeconomic data indicates a moderate slowing of the economy, while evidence of the country’s well-flagged ‘’rebalancing’’ continues in terms of a greater contribution to growth provided by consumption.
• India’s equity markets rebounded from the March 2018 lows, however have yet to reach the heights reached in January this year.Full year earnings are being disclosed, and encouraging noises have been made by those reporting so far.Expectations are for considerably better results than we have seen in the past four years.
• We have reduced the underweight to India through partial top ups of existing positions, and we added a new position with the introduction of Sandhar Technologies, which listed at the end of March 2018.

Market update

China’s real GDP increased by 6.8% year on year (YOY) in Q1 2018, unchanged from Q4 2017 but down from the 6.9% the previous year. Final consumption, including private and government consumption expenditure, contributed 5.3% to growth, compared with 4.1% in 2017. By contrast, gross capital formation (investment) contributed 2.1% in 2018, the same level as 2017.

It is also worth highlighting the strength of Chinese residential real estate investment last quarter which increased by 13.3% YOY in Q1, up from 9.4% in 2017, despite targeted tightening. Independent research provider CLSA anticipates a 7.8% rise in aggregate residential property prices this year. Meanwhile, ongoing affordability concerns should be put in context given that Tier 1 cities account for circa 3% of national home sales, while residential price growth in smaller cities has been running below income growth for several years. Nevertheless, trend growth in tier 3 cities, which account for c. 70% of home sales, need to be monitored closely.

One other key development is worth mentioning. That is the timely speech given by President Xi at the Bo’ao Forum. Conciliatory rhetoric on trade, particularly in the areas of autos and intellectual property, in addition to reiterating China’s intention to open the financial sector, promote imports and revise the negative list for foreign investment, struck a positive chord with the Trump administration and appears to have removed the spectre of an all-out trade war – for now. However, on a long term basis, it might be worth ascribing a higher risk premium when valuing trade sensitive sectors, including tech, home appliances, apparels and shipping.

In India, news that Goods and Sales Tax (GST) receipts topped one trillion rupees for the first time in April further justified the government’s introduction of the pan-Indian tax in July 2017.  The continued formalisation of the economy, through reforms such as GST will drive efficiencies across the country and provide opportunities for the organised and listed business enterprises.

India’s midcaps were the outperformers over the course of the month, regaining some of the losses incurred in the two previous months, with both domestic as well as global commentary turning more favourable.  The Reserve Bank of India’s announcement at the start of the month was less hawkish than had been expected, with inflation chatter more sanguine giving further solace to the equity markets. 

Information technology was the best performing sector on the back of encouraging results of the Indian domestic heavyweights, which was further bolstered by strong international IT result announcements.  India’s IT sector has been under considerable pressure, especially since the US election result in November 2016, when President-elect Trump disclosed a number of clampdowns on non-US IT workers based in the US.

For the Fund, consumer discretionary and industrials sectors were the strongest areas of performance, with road builder Ashoka Buildcon receiving positive news on a number of project tenders, while Motherson Sumi, an auto-ancillary manufacturer delivered a strong month.

Fund activity

China

Although we have seen an alleviation in equity market pressure and reduced volatility in the near term, market internals continue to lean bearish. This is evidenced by the fact that four of our five internal indicators are in ‘bearish’ mode, with one indicator in ‘neutral’. We are currently running a moderate underweight allocation to China via the use of a futures overlay. In terms of the equity portfolio, we have a strong bias to domestically focused China companies. Real estate, materials and healthcare are the major overweight positions, almost entirely funded by an underweight to the technology and e-commerce sector, relative to the MSCI China index

India

Sandhar is one of the leading auto-ancillary parts makers in India, and will seek to benefit from the growth in two and four-wheel vehicles in India, as well as extending its reach beyond domestic borders.  The fund retains an overweight to this segment, through holdings in Eicher Motors, maker of the Royal Enfield brand, Endurance as well as Motherson Sumi.  These holdings complement each other, and offer varying access to a market that grew 12% in April alone, with sales increasing in both autos and motorbikes in India and further afield.  No further new additions have been made in the month.

Outlook

For China, one interesting theme that has caught our attention of late has been market deepening developments in the financial sector. It is generally agreed that a few key factors are important for the RMB (renminbi) to become a global accepted reserve currency, and they include the size of China’s economy, the reputation of its central bank and reasonably free cross-border portfolio capital flow, including easy access to RMB-denominated assets, and a deep onshore financial market.

In recent months, investors have witnessed several policy announcements including the removal of some restrictions on foreign ownership of domestic financial institutions, a potential listing of Chinese Depository Receipts, the quadrupling of daily quotas for the Stock Connects and the launch of RMB oil futures. After a two year hiatus in financial liberalisation following the market panic in late 2015, there are signs that Beijing may have started to actively pursue its long term strategical goal for RMB reserve status again.

For India, the most significant upcoming news will be the announcement in mid-May of the results of the Karnataka elections.  With a population of more than 60 million, the state is currently under the leadership of the Congress party, the same party that unceremoniously defeated by Prime Minister Modi’s Bharat Janata Party (BJP) at the general election of 2014. 

Modi has visited the state to encourage the voters to focus on the job creation and electrification of villages since the BJP have been in power, while reiterating a vote for the BJP candidates in the state elections would be rewarded by further support from Modi in Delhi.  The trend under Modi of increasing oil prices in line with global averages has been suspended ahead of these important state elections, a further sign that the government are endearing themselves to the voter, particularly the rural voter at that.

Sentiment following the Karnataka elections will be critical for Modi moving forward to the general election due to be held no later than spring 2019.  Modi will be keen to nip any negative momentum in the bud ahead of further state elections later this year that could derail his plans for an election victory that would enable further reforms to be rolled out.