First Quarter 2020

The China Region Fund lost 15.02 percent in the first quarter 2020, underperforming its benchmark, the Hang Seng Composite Index, which lost 14.46 percent. See complete fund performance here.

The fund underperformed its index by 56 basis points mostly due to stock selection in information technology and its overweight position in consumer services. On December 31, 2019, health officials in Wuhan, China confirmed the first 27 cases of the novel coronavirus and closed a street market they believed was related to the virus's spread. Following that action, the illness spread quickly within China and later traveled to Europe and the United States. National lockdowns negatively affected China as well as other global economies.

Past performance does not guarantee future results. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost.

Strengths

  • The fund’s superior stock selection in Hong Kong had the most positive effect on the fund’s performance relative to the index. In particular, its allocation in food and real estate development was the most helpful.
  • On the sector level, the fund’s overweight position in consumer staples and properties & construction had the most positive effect on the fund’s performance relative to the index.
  • The top three positive contributors were as follows:
    • Yihai International Holdings The Chinese food maker and distributor contributed a positive 2.71 percent to the fund’s performance. Hot-pot condiment maker Yihai benefited from lockdowns as people consumed more prepared instant meals at home. Shares gained 29 percent in the first quarter.
    • Country Garden Holdings The real estate development company contributed a positive 87 basis points to the fund’s performance. We believe the company is well positioned for market share gains due to its strong network in low-tier cities and plenty of cash available for mergers and acquisitions. Shares gained 20 percent in the first quarter.
    • Longfor Group Holdings The real estate development company contributed a positive 29 basis point to the fund’s performance. At the end of March, Longfor reported strong earnings in 2109 with revenue growth of 30 percent year-over-year. Citibank says it expect Chinse property companies to appreciate due to better sales in the second quarter and favorable prices in some cities. Shares gained 3.7 percent in the first quarter.

Weaknesses

  • On the country level, the fund’s overweight position in Indonesia and South Korea had the most negative effect on the fund’s performance relative to the index. In Indonesia, stock selection in the media industry did not work well. PT Media Nusantara Citra was the weakest equity, losing more than 50 percent of its market share in three months. The company lowered its full-year revenue target to 7-9 percent from 12-13 percent on the back on the COVID-19 pandemic. In South Korea, stock selection in engineering & construction did not work well. Samsung lost half of its market share in the first three months of the year. The tech firm reported below-consensus fourth quarter operating profit, and 2020 revenue will be under further pressure due to the slowdown in construction activity.
  • On the sector level, the fund’s overweight position in consumer services had the most negative effect on the fund’s performance relative to the index. The overweight position in PT Media Nusantara Citra has the most negative effect on fund’s performance.
  • The top three negative contributors were as follows:
    • PT Media Nusantara Citra The Indonesian media company contributed negative 1.5 percent to the fund’s performance. The company lowered its full-year revenue target to 7-9 percent from 12-13 percent on the back on the COVID-19 outbreak.
    • Weichai Power The vehicles maker and distributor contributed negative 1.4 percent to the fund’s performance. Equity shares sold off in the first quarter due to global weakness, but the company expects revenue to rise by about 8 percent this year despite the ugly outlook. With monetary stimulus from Beijing, there could be an increased demand for its products. Citi predicts that Weichai’s market share could rise to 40 percent in three years from the current level of 33 percent.
    • Ping An Insurance Company of China The company contributed negative 1.3 percent to the fund’s performance. Ping An Insurance said the gross premium income of its four subsidiaries for the first quarter fell 5.99 percent year-on-year to 257.8 billion yuan. Sales in the first quarter were weak but most likely will recover in the second quarter, as the outbreak in China gradually comes under control.

Outlook

The spread of coronavirus at the beginning of the first quarter paralyzed Chinese society, and the nationwide shutdown led to an economic slowdown in mid-February. By March 19, the number of new domestically driven cases fell to zero. And new cases in China were recent returnees who found it safer to be in China than in Europe and the U.S., where the illness had travelled. The more-than two-month lockdown in Wuhan, where the coronavirus outbreak started, was gradually lifted at the beginning of April. The economic damage to China is severe, and its prospects for recovery remain uncertain. Analysts surveyed by Reuters forecast growth of just 2.5 percent in 2020, the weakest since 1976. That is a sharp easing from a 6.1 percent gain in 2019.

While China’s economy is slowly restarting, major  European economies are in nationwide lockdown and the United States is still in the early stages of battling COVID-19. China will likely struggle to find enough customers across the West as supply chains have been disrupted. The revival of the world trade and well-functioning supply networks is essential to growth recovery in both China and the West.

According to Carnegie, within Asia, Thailand may be the most negatively affected as the country was already struggling with a sluggish economy, aging population and weak domestic investment. But other Southeast Asia countries, like Indonesia, the Philippines and Vietnam, will be negatively affected by their high dependence on tourists from China and other countries. 

The spread of the coronavirus started in China. It was the first country to implement national lockdown, and it was also the first country to remove the restrictions. The success of recovery will depend on the country’s ability to produce goods and distribute them globally, as well as lack of future new coronavirus cases.

 

The Hang Seng Composite Index is a market capitalization-weighted index that comprises the top 200 companies listed on Stock Exchange of Hong Kong, based on average market cap for the 12 months.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the China Region Fund as a percentage of net assets as of 3/31/2020: YIHAI International 13.68%, Country Garden Holdings Co. Ltd. 4.75%, Longfor Group Holdings Ltd. 5.95%, Media Nusantara Citra Tbk PT 1.51%, Weichai Power Co. Ltd. 4.41%, PING AN 6.58%.

Net Asset Value
as of 07/10/2020

Global Resources Fund PSPFX $4.42 0.07 Gold and Precious Metals Fund USERX $12.22 -0.12 World Precious Minerals Fund UNWPX $4.32 -0.03 China Region Fund USCOX $9.40 -0.10 Emerging Europe Fund EUROX $5.77 0.02 All American Equity Fund GBTFX $22.74 0.07 Global Luxury Goods Fund USLUX $15.89 0.17 Near-Term Tax Free Fund NEARX $2.25 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change