In September the fund appreciated by 1.7% in GBP, bringing the nine month return to 9.2%. The quarterly dividend was 0.198545p giving a 12-month running yield of 6.7% after withholding taxes, or 500 basis points over UK CPI.
At their simplest, markets are driven by the “5 Ps” – Policy, Politics, Positioning, Profits and Price. For the past few months it’s the first two that’ve been firmly in the driving seat, with a larger than expected US Fed rate cut and a dramatic change in course in policy within the Chinese Politburo. This triggered a sharp rally in the markets in the last few days of the month.
Details are being released piecemeal, but it’s possible they’re in the process of implementing the largest and most co-ordinated package of monetary and fiscal measures since the global financial crisis. As always, the market is focused on quick fixes and so has become preoccupied by the size of a hinted TARP-like fiscal ‘bazooka’. In part this is because they’ve done it before and it worked, in 2016 and during the GFC when the stimulus package was over 12% of GDP, so expectations are quite high.
The big issue is whether these new measures are likely to represent a meaningful resolution to the increasingly well-understood and entrenched problems, or simply another adrenalin shot. One of the most significant and intractable of these issues is reversing the debt deflation cycle caused by falling real estate prices, which has been a doom-loop for consumer sentiment. So far there’s been fiscal support for regional governments, a further cut in mortgage rates and state funding to purchase unsold real-estate inventory. Whilst there’s some early signs of improvement in sentiment, in the past these have proved short-lived. The basic problem remains that Tier 1 cities are still overpriced, Tier 2 is overpriced and oversupplied and Tier 3 is simply oversupplied, unfortunately there’s no magic bullet.
We’re now unlikely to hear about further fiscal stimulus until after the US election, but even then there’s the ongoing debate as to what it should be spent on. The hope is that it will be directed more squarely on the consumer to redress the imbalance between manufacturing exports and domestic demand. Consumer spending in China is only 39% of GDP, the lowest amongst major EM countries.
What is clear is that a line in the sand has been drawn. The Politburo doesn’t want the market to fall further, and as China is primarily a policy driven market it has dutifully obliged. For good measure, and to stoke animal spirits amongst locals, there’s also a new state-funded facility that effectively ‘repos’ equities for company buy-backs and retail clients. Having lured retail investors into the market policy makers are at least now more strongly aligned with our interests.
If they are able to engineer some kind of cyclical rebound, then earnings are also understated. Nevertheless, there are still many other deep structural issues which require a more comprehensive re-think and which are anathema to the orthodoxy in Beijing and will be hard to shift.
Market volatility has increased noticeably, which makes us wary as we look to maintain our 20% exposure. Currently our approach is to balance the exposure sensibly between solid yield generating positions, which tend to be SOEs, with some higher exposure to POE consumer stocks that offer a degree of optionality, should policy turn towards a more sustainable positive feedback loop.
