PERFORMANCE COMMENT
The Chinese and Hong Kong markets delivered positive returns in December, rebounding after two months of correction from their October highs. The recovery was driven by high-dividend-yielding stocks, optimism surrounding state-owned enterprise reforms, and solid performance from quality internet names. Sector performance was mixed: high-dividend-yield SOE stocks, such as SOE banks, outperformed, while the healthcare and materials sectors gave a muted performance. Notably, the Hong Kong market outpaced the onshore A-share market. In 2024, the China and Hong Kong markets reversed direction after a three-year correction, outperforming regional peers despite heightened volatility.
The LO Funds–China High Conviction Fund slightly underperformed its benchmark in December. Positive contributions from stock selection in Information Technology and Industrials were offset by the Fund’s underweight exposure to Banks.
MACRO REVIEW
China’s macroeconomic data for November highlighted the uneven nature of its recovery. Retail sales grew 3.0% y/y, a deceleration sequentially, reflecting weakening domestic demand following strong sequential gains in October and September. A breakdown of FAI data showed continued strength in manufacturing investment (+9.3% y/y) but persistent weakness in real estate (-11.5% y/y). Merchandise exports grew 6.7% y/y in USD terms but declined sequentially. Investor sentiment was also shaped by the outcomes of the Central Economic Work Conference (CEWC), which fell short of market expectations. On the geopolitical front, the US expanded chip export controls, adding 140 Chinese entities to its Entity List and initiating a new Section 301 investigation into China’s legacy node chips. While offshore investors expressed caution, onshore sentiment was relatively optimistic, with many hopeful for improved US-China relations in 2025. High-dividend-yielding stocks attracted robust inflows, supported by life insurers and asset allocators seeking returns in a low-yield environment. Additionally, updated SOE reform guidance from the State-owned Assets Supervision and Administration Commission (SASAC) bolstered confidence in long-term value creation. After Trump’s inauguration, all eyes will be on the US’s tariff actions and China’s response, as well as potential additional consumption stimulus policies into Chinese New Year.
PORTFOLIO ACTIVITY
During the month, the Fund made minor adjustments to its holdings, taking profits from some outperformers and reallocating to stocks with more attractive risk-reward profiles. No new positions were initiated or exited during the month.
Our strategy remains focused on mid- and large-cap growth companies at reasonable valuations, which we still believe is the best way to generate alpha. We continue to like the quality of our portfolio, with a good balance of large-caps and mid-caps with bottom-up, growth-related names that are less affected by regulation and policies.
TOP PERFORMANCE CONTRIBUTORS/DETRACTORS
The top contributors for the month were China Merchants Bank, Miniso, and Gambol Pet Food. China Merchants Bank rose 14% in December, as high-quality, high-dividend stocks remained in favour among onshore investors. Miniso rebounded strongly, gaining 22% during the month, following management’s reiteration of robust growth guidance for 2024 and 2025. Gambol Pet Food saw its valuation premium expand, as investors increasingly recognised the value of leading pet food companies benefiting from China’s long-term demographic trends.
The top detractors were Jiangsu Hengrui, Meituan, and Advanced Micro-Fabrication. Jiangsu Hengrui and Advanced Micro-Fabrication declined alongside broader A-share healthcare and IT sectors, likely due to year-end sector rotation. Meituan underperformed despite no company-specific fundamental issues, facing selling pressure following its strong ownership by investors. This was compounded by weakened confidence in the overall consumption recovery after the CEWC meeting failed to meet market expectations.
As we head into 2025, uncertainties over Trump’s trade policies and the impact on Chinese equities should continue to linger. While we expect more volatility ahead, our strategy remains highly disciplined in picking the best companies that can deliver sustainable, long-term earnings growth. Providing stimulus to meet external shocks in 2025 imposes risks to either side. We believe a market-wide rerating is possible but dependent on policy effectiveness. However, our positioning does not assume a market-wide rerating, which, should it happen, offers positive optionality. We focus on mid-term structural changes in the domestic market. For example, a shift in consumer behaviour towards services consumption. We also focus on high-dividend-yielding stocks that deliver attractive total returns through dividends and buybacks. Valuation remains very supportive versus history as well as peer markets.
Thank you for your continued support.
LOIM Asia/Emerging Equities team