Guinness China A Share

October Commentary

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Onshore Chinese stocks, as measured by the MSCI China A Onshore Index, fell 13.4% in GBP in the third quarter, driven chiefly by Information Technology, which fell as investors took profits after strong earlier gains and sentiment around the AI trade became more cautious. The Guinness China A Share Fund benefited from its underweight to IT, while detractors from performance included its Materials stocks and underweights in Financials, Energy, Utilities and Real Estate, all of which outperformed. On a forward basis, the Fund is trading on a price/earnings ratio of 15.1x, 20% below its long-term average of 18.9x and toward the lower end of its historical range. The current holdings trade at only a 9% premium to the MSCI China A Onshore Index, compared with a historical average of 41%. Sentiment towards Consumer Discretionary, the Fund’s largest overweight, is low enough that a mere normalisation in the consumer economy – without major economic stimulus – could offer a substantial uplift to our holdings on a five-year view. In Industrials, another key overweight, the Fund’s holdings have generally not been valued like the most obvious beneficiaries of the AI theme even though they have exposure to both this and other structural growth themes. In our view, these contribute to a portfolio valuation which is attractive both in absolute terms and relative to its own history. In this commentary, we assess the drivers of returns in the third quarter and year-to-date, the leaders and laggards in the portfolio, and consider the outlook.