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Summary
Monthly performance
The Ashburton Chindia Equity Fund returned -0.55% in February, with the MSCI Emerging Markets Index returning 0.23%.
Market update
China
MSCI China returned 3.45% in February as market consensus regarding ongoing US-China trade tariff negotiations moved closer to pricing in a pact by the end of March. It is hoped existing US tariffs on Chinese goods are terminated and China reciprocates with a lowering of tariffs across US agricultural, chemical and auto parts sectors, as well as barriers to foreign investment.
Domestically, sentiment in China has risen on realisation that at the macro level monetary tightening has peaked, while at the micro level, the forced selling of equities triggered by the pledged share issue climaxed in Q4 18. Another positive catalyst is the pending likely further MSCI inclusion of A shares amid continuing evidence of robust inflows ‘northbound’ via the Hong Kong stock connect.
India
MSCI India returned 0.22% as evidence of domestic fiscal deterioration at the government level capped investor enthusiasm for equities. The fiscal deficit for current FY19 has been revised up to 3.4% of GDP, whilst tax collections have risen just 7% YoY in the first nine months, compared with the government’s revised full-year estimate of 17% YoY.
Actual tax revenue collections could produce a shortfall of some 0.6-0.7trn rupees according to CLSA, whilst government expenditure is budgeted to increase by 13% in FY20 with the government spending, for example, 750bn rupees per annum on a farm income support plan. Thus far at least, the reaction of both the bond and currency markets has been muted.
Country exposure
Our capital allocation model seeks to generate positive alpha on balance, through cycles, by actively tilting the country exposure between China and India. The model generates, on average, 1-2 signals per annum, remaining neutral circa. 70% of the time. The current model signal is neutral, advocating a close-to 50% allocation to both countries.
Fund positioning remained consistent with respect to stock selection this month. We have maintained high exposure to the industrials, real estate and utilities sectors, funded by significant underweights to information technology and communication services, relative to the MSCI China Index. These two underweight sector positions have been in place for an extended period of time.
Note: sector positioning is an output of our bottom-up, quantitative-driven stock selection process and does not reflect a discretionary/thematic view.
No position changes to report in terms of sector positioning or stock selection.
Domestically, attention will turn to the ‘Lianghui’, or ‘two sessions’, the most important government meetings in China’s political calendar. Expectations are high around developments in taxation and the impact on personal consumption patterns, and supportive measures for SME’s and consumption.
Economic opening and policies to support rebalancing and upgrading should also feature prominently at the event which begins 3 March. Other areas for observers to focus on may include looser targets for GDP growth, money supply and pollution control.
The key risk to India equities in the short to medium-term remains growing uncertainty about the election outcome that could lead to a slowdown in the frequency and magnitude of inflows into domestic equity funds. This has arguably been the main catalyst for the stock market rally since Modi was elected in May 2014.
The latest data provides further evidence that such a decline is happening. Thus, inflows into equity mutual funds, excluding arbitrage funds, declined by 17% MoM and 58% YoY in January to US$0.8bn in January, the lowest monthly inflow since September 2016.
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