PERFORMANCE COMMENT
The Chinese equity market delivered a strong performance in February 2025, with the MSCI China All Shares Net Total Return Index ending the month at +8%, significantly outpacing the MSCI World Index. This outperformance was driven by continued AI optimism, property market stabilisation and supportive policy developments. Sector performance was broadly positive, with Consumer Discretionary, Communication Services, Information Technology and Real Estate leading the charge, all posting double-digit returns. In contrast, Energy, Utilities and Materials underperformed, ending the month in negative territory amid subdued demand and broader macroeconomic headwinds. The H-share market continued its outperformance trend, surpassing both ADRs and the onshore A-share market. This reflects stronger investor appetite for offshore-listed Chinese equities, particularly in sectors tied to technology.
The LO Funds–China High Conviction Fund outperformed its benchmark in February, driven by successful sector allocation and stock selection. The Fund’s stock selection in Financials and Communication Services also proved effective, contributing to relative returns.
MACRO REVIEW
February was marked by a resurgence of optimism in the Technology sector, driven by growing enthusiasm for AI and robotics. This momentum led to a re-rating of IT and internet stocks, supported by several key catalysts. President Xi’s meeting with top tech firms—the first since November 2018—signalled renewed government support for the sector. Additionally, Alibaba’s stronger-than-expected 4Q24 results and ambitious AI capex plans further bolstered investor confidence, underscoring the sector’s potential for long-term growth. In the property market, signs of stabilisation in tier-1 cities such as Shanghai and Shenzhen, coupled with the restructuring of Vanke, helped alleviate concerns of a broader fallout. These developments provided a much-needed boost to market sentiment, particularly in sectors tied to real estate and construction. However, geopolitical tensions remained a key source of volatility. The release of the US’s “America First Investment Policy” on 21 February and the unexpected imposition of an additional 10% tariff on Chinese goods on 27 February triggered a minor market pullback. These measures reignited fears of escalating trade tensions, though the market’s reaction was relatively muted compared to previous episodes of geopolitical friction. Looking ahead, all eyes are on the National People’s Congress (NPC) meeting in March. Investors are keenly awaiting policy announcements that could provide further clarity on China’s economic priorities, particularly in areas such as consumption, technological innovation and fiscal stimulus. The NPC’s emphasis on these themes is expected to shape market sentiment and drive sectoral performance in the coming months.
PORTFOLIO ACTIVITY
During the month, the Fund made selective adjustments to its holdings, taking profits from some outperformers and reallocating to stocks with more attractive risk-reward profiles. We initiated positions in Will Semiconductor and Shennan Circuits to build exposure to the AI capex supply chain, reflecting our conviction in the long-term growth potential of the Technology sector. Meanwhile, we exited Gambol Pet Food, locking in solid gains as valuations became stretched and less attractive. We also exited CMOC Group to reduce our weighting in the Materials sector, aligning with our strategic focus on sectors with stronger growth prospects.
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
The top contributors for the month were Alibaba, BYD and Xiaomi, all benefiting from the broader optimism in the Technology sector. Alibaba’s stronger-than-expected 4Q24 results and ambitious AI capex plans bolstered investor confidence, highlighting the company’s leadership in the sector and its potential for long-term growth. Xiaomi also gave a strong performance following the successful launch of its new SU7 ultra SUV model, which was well-received by the market.
On the detractors’ side, Trip.com, Miniso, and Zijin Mining weighed on performance. Trip.com corrected by 20% in February as the market reacted negatively to management’s decision to significantly increase sales and marketing investments in international markets. Miniso underperformed as investors anticipated weaker quarterly earnings, while Zijin Mining faced negative flows out of the Materials sector.
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 for 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
