LO Funds
China High Conviction

MACRO AND MARKET REVIEW

The Chinese equity market presented a tale of two halves in April. The month began with significant volatility as higher-than-expected reciprocal tariffs announced by the US on Liberation Day (2 April), coupled with their immediate implementation, raised concerns about a potential trade slowdown and even global recession risks. This triggered a sharp market decline in the first half of the month. However, markets rebounded swiftly following a policy reversal that included a 90-day exemption for most affected goods and regions.

During April, the MSCI China All Shares Index declined by 3.85% in USD terms, underperforming the MSCI World Index, which returned 93 bps. Sector performance was broadly negative, with Consumer Discretionary, Information Technology, Materials and Energy experiencing the most significant declines. In contrast, Utilities, Real Estate and Consumer Staples managed to end the month in positive territory.

The Politburo meeting on 25 April, held after the US tariff hikes, provided important high-level policy guidance. Leaders emphasised preparing emergency plans to mitigate external shocks while indicating no immediate need for large-scale stimulus following the US policy shift. They reaffirmed intentions to implement targeted interest-rate cuts and reserve requirement adjustments when appropriate, stabilise the property market, and support businesses most affected by tariffs. While concrete stimulus measures were lacking, the meeting notably emphasised strengthening domestic consumption to drive economic momentum, with potential new fiscal support focused on service sectors.

PORTFOLIO ACTIVITY

The Fund implemented measured portfolio adjustments during the month, capitalising on outperforming positions while selectively reallocating to opportunities with more compelling risk/reward characteristics. While we maintained our core holdings without initiating new positions or complete exits, we proactively reduced exposure to US-market-sensitive names early in the period as trade tensions escalated. Following the market pullback, we strategically rebalanced part of our defensive high-yield allocations toward quality internet companies that we believe offer superior growth potential at more attractive valuations.

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.

PERFORMANCE

April proved to be a challenging month, yet the LO Funds–China High Conviction Fund managed to outperform its benchmark. Strong stock selection, particularly in Consumer Discretionary, Consumer Staples and Materials, helped offset the drag from sector allocation.

Our new consumption theme continued to outperform, benefiting from its self-sufficient nature and relative independence from global trade tensions. Pop Mart was a significant contributor, reporting another strong quarterly earnings performance with overseas growth exceeding expectations. Proya Cosmetics also delivered a notable earnings beat, with its new product line performing ahead of expectations. Chow Tai Fook delivered better-than-expected operating data for Q1 and indicated that FY25 margins should surpass previous guidance, benefiting from rising gold prices and an increased mix of high-gross-margin products, despite an acceleration in store closures.

On the negative side, Wuxi Bio was a detractor as it became caught in the crossfire of US-China trade tensions. Both FUTU and CMB also detracted from performance as equity market volatility raised concerns about client assets under management (AUM) stability and pressure on wealth management fees.

OUTLOOK

Looking ahead, we expect uncertainties surrounding US-China trade policies to persist, likely contributing to ongoing market volatility. However, we remain optimistic about structural growth opportunities in technological advancements, particularly in AI and robotics. Amid these market dynamics, we maintain our disciplined focus on high-quality companies capable of delivering sustainable, long-term earnings growth.

Beyond technology, we continue to monitor important structural shifts in domestic markets, particularly the ongoing transition in consumer behaviour toward services consumption. We also maintain our emphasis on high-dividend-yielding stocks that offer attractive total returns through a combination of dividends and share buybacks. Current valuations remain supportive both historically and relative to peer markets, providing a favourable backdrop for our investment strategy.

In China, we continue to emphasise three key areas: domestic consumption growth, technological innovation, and industrial advancement, with a particular focus on companies expanding their global market presence beyond US exposure. We also prioritise high-quality, dividend-yielding stocks that provide attractive returns through consistent payouts and share repurchases.

Thank you for your continued support.

LOIM Asia/Emerging Equities team