EI Sturdza Strategic Management Limited: EI Sturdza Investment Fund: Lilian Co, Portfolio Manager of the Strategic China Panda Fund, sees further upside for Chinese equities in 2018
Press releaseEI Sturdza Investment Fund: Lilian Co, Portfolio Manager of the Strategic China Panda Fund, sees further upside for Chinese equities in 2018
- Increasing consumption and a growing middle class are expected to be supportive of equity investments
- Strategic China Panda Fund (USD Class) returned 63 percent in 2017
- The strong return in 2017, pushed the Fund's relative outperformance of the benchmark since inception to 111 percent
- The Fund's portfolio is currently being focussed towards themes / sectors that have high levels of growth momentum, such as Consumer Discretionary, IT and materials
- Lilian Co expects growth in China to moderate in the coming years; however still to be in excess of other global markets and that 2017 represented a "revision to mean" given that valuations came into the year at depressed levels
Frankfurt, 15 February 2018 - Lilian Co, who manages the Strategic China Panda Fund (ISIN IE00B3DKH950), a UCITS compliant Chinese equity fund, for EI Sturdza Strategic Management Limited, a boutique asset manager, believes that the exceptionally strong run for the Chinese equity markets in 2017 represents a "revision to mean" given that valuations came into the year at depressed levels. This meant that Chinese equities were trading at single digit P/E's, whilst offering decent returns. Investors however remained sceptical regarding the growth potential for the Chinese market, with lingering concerns as to whether the market would be subject to a hard landing. This scepticism lead to an under appreciation of the quality of Chinese assets and their growth potential, resulting in the market being penalised by international investors, who retained a structural underweighting. 2017 highlighted the strength and quality of earnings growth, supported by domestic inflows to equity markets.
Lilian Co believes that the negative effects of the reforms within the Chinese markets are now reaching an end and that the Chinese companies have been able to demonstrate their strength as a result of a corporate earnings recovery, attributable to structural changes which have been implemented, rather than a cyclical upturn.
From a longer term and macro economic point of view, Lilian believes that; China remains underweight in the majority of international investor portfolios, that China continues to strive to open its markets - which will have a long term beneficial impact and that the market will become increasingly interesting to foreign investors once attention refocuses on corporate earning growth, rather than a pure "China" macro / cyclical view.
Attractive investment opportunities in 2018 In light of this macro-economic view, Lilian believes that Chinese equities offer attractive investment opportunities in 2018, commenting that "China has a growing middle class which is prepared to spend more money on higher quality products. In particular traditional consumer goods stocks are likely to benefit from the growing demand and China's transition to become a more consumption-oriented economy".
Chinese and Hong Kong consumers are adjusting their focus, now considering both a products quality, as well as cost, a transition from a mind-set which has been maintained over the past few years, which was solely focussed on the perceived value of goods. In addition to the manufacturers of consumer goods, the IT and automotive industries will also benefit from this structural trend. As such the shares of Chinese suppliers to these industries that have refocused on "quality" are expected to enjoy strong growth.
Significantly higher than average performance
The Strategic China Panda Fund, which launched on the 3rd October 2008, has returned over 255 percent to investors (as of 31 December 2017), representing a relative outperformance of its benchmark, the MSCI China NR USD of 111 percent. This translates to an annualised return for the Fund of approximately 15 percent, compared to 10.2 percent for the benchmark.
The Fund's compelling risk/return profile has been recognised by Morningstar who have awarded it a 5 star rating over 3 years. Further Lilian is AA rated by Citywire.
High-tech and Consumer Discretionary stocks are favoured in 2018
As at the end of December 2017 the Fund held 41 stocks, with the largest exposures being to the Consumer Discretionary sector (38.10 percent +28.73 percent on a relative basis) and materials, whilst being notably underweight Financials (-13.34 percent) and IT. Whilst IT is underweight on a relative basis, this remains the Fund's second largest exposure at the sector level, representing 33.42 percent of the portfolio, with 4 of the top 5 holdings being within the sector, with Tencent remaining the Fund's largest position, followed by Alibaba and Sunny Optical.
High conviction themes, which supported the Fund's performance in 2017, remain top allocations for the Fund as we move into 2018. "We are taking a very positive view of the Chinese equities market. Our favourites for 2018 continue to be IT stocks and the non-basic consumer goods sector. We regard periods of weakness as being an opportunity to buy, as fundamental Chinese data continues to remain intact and the price/earnings ratio of 13 is reasonable", explains Lilian.
In terms of the Fund's consumer discretionary exposure, Lilian states that "this overweighting is due to the growth I have already mentioned in the Chinese middle class, and also their readiness to pay more for quality products".
In terms of market capitalisation, the portfolio has a large cap bias to stocks with a capitalisation of more than USD 5 billion, which represented 82 percent of NAV as at the end of December 2017. Exposure to mid and small cap stocks stood at 10 percent and 8 percent respectively by contrast. The team continue to look for growing companies which are trading at reasonable prices, looking to capitalise on mispricing opportunities, studying earning forecasts, which they believe can provide indicators of potential opportunities when they differ from the market consensus. This is then combined with a fundamental bottom up stock selection process and results in a concentrated portfolio of between 30-45 stocks, taking active single stock and sector bets.
Interest in A shares expected to increase In addition, the attractiveness of the Chinese equities market is expected to result in growing interest among international investors, thanks to the decision to include equities from mainland China, so-called A-shares, in the MSCI Emerging Markets index. This is scheduled to start in May 2018. From this date, an initial 222 shares out of 1,700 stocks are to be included in the index; however it is expected that this number will increase over time. In tandem Chinese companies are striving to move further in line with Western standards with respect to transparency, anti-corruption and reporting, all of which is supportive for further investment by foreign investors.
Portfolio manager Lilian Co has more than 20 years of experience in the investment industry, focusing on Asian equities.
About E.I. Sturdza
E.I. Sturdza Strategic Management Limited (EI Sturdza) was formed in November 1999 and forms part of the Eric Sturdza Banking Group which is headquartered in Geneva. In total the group manages approximately USD 10 billion, of which USD 4 billion is attributable to EI Sturdza. EI Sturdza is responsible for the group's fund activities, and bases its work on exclusive alliances with select portfolio managers who are all leaders in their sector and have solid, long-term track records. EI Sturdza provides its portfolio managers with an extensive infrastructure, which allows them to focus purely on portfolio management.
You can find more information at www.eisturdza.com
Source: NAV & Performance - Morningstar, Allocation - Bloomberg, Index - MSCI
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