Comment by Andreas Roemer, head of emerging markets, DWS Investments
The MSCI China index rebounded strongly in October both driven by a relief rally globally and some Chinese specific reasons. Premier Wen indicated ‘flexibility’ and ‘fine-tuning’ in the government’s monetary policy, widely regarded as a key signal for ending the current monetary tightening. Market sentiment was also restored by the government’s determination to support small and medium enterprises by launching a series of new measures and higher new bank lending. Central Huijin’s, the investment arm of China’s sovereign wealth fund, increase of its stake in the listed banks also demonstrated confidence, as did the suspension of an issuance of 3-year treasury bonds by the People’s Bank of China (PBOC) which led to decline in interbank rates, another strong indication of more credit loosening.
The reduction of the reserve rate requirements by 50bps from the PBOC on 30 November is the most noticeable signal that the monetary easing process has already started in China.
Performance commentary – DWS Invest Chinese Equities fund
Materials outperformed other sectors, especially cement stocks. The property sector also rallied from very depressed levels. Another oversold sector, industrial stocks, rebounded strongly led by railway related and machinery stocks. Other policy sensitive sectors such as banks and insurance also performed strongly.
The DWS Invest Chinese Equities fund recently increased weightings in banks, property, cement, and upstream oil stocks, due to their potential recovery prospects as the government was expected to loosen monetary policy.
Key overweights:
• Energy – positive on coal stocks as coal prices are well supported by relatively tight supply and steady demand growth.
• Telecom – defensive earnings with 3G being the key growth driver; focusing on 3G beneficiaries.
• Utilities – focusing on natural gas distributors which offer sustainable, double-digit earnings growth.
• Healthcare – leading providers for medical consumables due to continued pricing pressure.
Outlook
While markets may consolidate in the near term after the strong recent rebound, we may see stronger market performance in the coming months with more clarity on government policy as inflation continues to drop. While development in the European credit market may continue to affect overall market sentiment, which has been the case for the past few months, we believe investors would become more positive about China’s economic outlook (achievement of soft landing) in the coming months.
For further information or to speak with Andreas, please call or email:
Zoe Butt/Neema Patel/Roisin Hynes
Broadgate Mainland
zbutt@broadgatemainland.com / npatel@broadgatemainland.com
/ rhynes@broadgatemainland.com
Tel: +44 (0)207 726 6111
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