PERFORMANCE COMMENT
The Chinese equity market continued to edge higher in March, with the MSCI China All Shares Net Total Return Index gaining 1.4% for the month, outperforming the MSCI World Index. The market was supported by stable currency conditions and selective earnings strength, although late-month profit-taking in technology stocks limited further gains. Sector performance was broadly positive, with Materials, Energy, and Communication Services leading the way. In contrast, Information Technology, Real Estate and Industrials lagged, ending the month in negative territory. The H-share market maintained its outperformance trend, surpassing both ADRs and the onshore A-share market. This reflects stronger investor interest in offshore-listed Chinese equities, particularly in technology-related sectors.
The LO Funds–China High Conviction Fund outperformed its benchmark in March, with strong stock selection offsetting drags from sector allocation. Stock selection in Consumer Discretionary was the key driver of relative returns. For Q1 2025, the Fund achieved notable outperformance against its benchmark.
MACRO REVIEW
The Chinese equity market presented a contrasting narrative through March. The month commenced with robust momentum as Q4 earnings surprises triggered a broad-based advance, lifting not only the customary Technology leaders, but also traditionally cyclical sectors such as Materials, Healthcare and Energy. Market sentiment became more measured following Tencent's 19 March disclosure of more conservative capital allocation plans, featuring tempered buyback activity and restrained capital expenditure guidance. The retreat intensified after Alibaba's Joe Tsai raised concerns about potential data centre oversupply during a 25 March industry forum, prompting profit-taking across Information Technology, Real Estate and new-energy vehicle sectors. Supportive macroeconomic conditions provided a cushion against more pronounced declines. Treasury yields moderated considerably during the period, with the 10-year UST yield concluding the month at 4.2%, while USD weakness coupled with stable USD/CNY exchange rates around 7.25 created favourable conditions for offshore-listed Chinese equities. Dialogue with investors revealed sustained confidence in private enterprises' capacity for innovation, though growing apprehension about challenges in Q2 stemming from softer export data and escalating tariff risks is becoming evident. Market participants are now anticipating potential policy signals from the late-April Politburo meeting, with some interpreting the Ministry of Finance's month-end review of state bank balance sheets as a preliminary indicator of possible stimulus measures.
PORTFOLIO ACTIVITY
During the month, the Fund made selective adjustments to its holdings, taking profits from certain outperformers and reallocating to stocks with more attractive risk-reward profiles. We initiated positions in UBTECH Robotics and Shenzhen Inovance Technology to enhance exposure to industrial automation and humanoid robotics – long-term themes in China that we view positively. Our repositioning also prioritised emerging consumption opportunities. For example, we initiated a position in Chow Tai Fook Jewellery, anticipating a recovery as their innovative fashion gold jewellery products expand addressable markets. Conversely, we exited positions in Bank of Ningbo and Zhongji Innolight due to a lack of near-term catalysts.
Our investment strategy remains centred on mid- and large-cap growth companies trading at reasonable valuations, which we continue to believe is the most effective approach to generating alpha. The portfolio maintains a high-quality balance of large-caps and mid-caps, with a focus on bottom-up, growth-oriented names that are less susceptible to regulatory and policy risks. This disciplined approach positions the Fund well to capitalise on emerging opportunities while managing downside risks.
TOP PERFORMANCE CONTRIBUTORS/DETRACTORS
Pop Mart emerged as a key contributor, driven by a strong earnings beat with better-than-expected growth across both domestic and overseas markets, highlighting the appeal of its IP-driven retail model. Trip.com also made a meaningful recovery as a contributor, rebounding from February’s sell-off on evidence of resilient travel demand and disciplined spending. Additionally, Runben Biotechnology, an emerging skincare brand in China, contributed positively thanks to rapid sales growth through online channels.
On the detractors’ side, Futu Holdings pulled back after a strong year-to-date rally as investors took profits. Advanced Micro-Fab faced challenges amid the broader sell-off in the Technology sector, while CRRC underperformed following Q4 earnings that fell short due to slower order bookings – a trend management expects to reverse in the coming quarter.
Looking ahead, uncertainties surrounding US-China trade policies and their impact on Chinese equities are likely to persist, contributing to ongoing market volatility. However, technological advancements in AI and robotics continue to present compelling structural growth opportunities, reinforcing our optimism in the sector’s long-term potential. Amid these dynamics, we remain disciplined in our focus on high-quality companies capable of delivering sustainable, long-term earnings growth.
Beyond technology, we are closely monitoring mid-term structural shifts in the domestic market, such as the ongoing transition in consumer behaviour towards services consumption. We also prioritise high-dividend-yielding stocks that offer attractive total returns through a combination of dividends and buybacks. Current valuations remain supportive, both historically and relative to peer markets, providing a favourable backdrop for our investment strategy.
Thank you for your continued support.
LOIM Asia/Emerging Equities team
