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17 Aug 2021
Stock markets continued their drift upwards in July as restrictions on economic activity were further lifted throughout the developed world. There was a marked difference between the performance of the MSCI World (+1.8%) and All Countries (+0.7%) however as China’s reforms of its private education and real estate sector left their mark on emerging markets’ valuations.
On a value weighted basis Chinese stocks lost about 14% over the past month, doubling to tripling the losses of the equally weighted counterpart of the index or mainland China-based companies (A-shares). This indicates that the largest, most outside oriented corporations suffered most from China’s efforts to target certain long-term structural goals. While the basic materials sector was able to post some gains due to worldwide shortages, the tiny sector could do little to offset the onslaught in much bigger sectors that suffered recent crackdowns (i.e., tech, real estate/financials and consumer-oriented sectors).
While technology alone made up about a third of the MSCI China’s value weighted underperformance in July this is mainly due to dreadful returns of Tencent, Meituan and Baidu – three heavy weights within the index. The remainder of the sector had a decent month all things considered. This is a major difference with the Consumer discretion sector, where mega caps and small caps alike recorded significant losses.
The technology and consumer discretionary stocks we had in the portfolio also got hit pretty hard, but this was compensated by a larger relative allocation to sectors that were able to escape the thorn of China’s policymakers and some good individual stock picks that held up relatively well in July.
Overall, we are convinced that the long-term outlook for China remains positive, but remain cautious in building up portfolio positions as the short-term sentiment clearly remains erratic.
Werner, Thierry & Nils