FMG (EU) China Fund +3.1% in the 1st Quarter of 2017

After a disappointing 2016, when the market lost mid-teens, Chinese A share stocks have started its path to recovery with mid-single digit gains during the first three months.

Economic data for February points to a continued recovery across the metrics. Most notable was the first month in nearly a year in which we have seen capital inflows exceed outflows, marking the end of a long period of concern over the RMB and capital movements. While they still remain a potential risk to the market, capital outflows and RMB depreciation appear to be stories moving in the rear-view mirror, and the implication for a potential reversal in capital flows and RMB value could be supportive of market strength.

GDP growth has accelerated after many years of deceleration.  Furthermore, earnings growth has reversed from a five year deceleration to quick acceleration during the first quarter.   We just observed a report from one of the largest financial houses that raised the earnings forecast to 15%, which would be the 2nd best earnings revision since 2009.

China has passed the risk stage fuelled by infrastructure growth and is pushing to make it to developed status, which means China may now enter the reward phase of that investment period.  Another confirmation of this trend can be seen from the retreat of Bear investors in the media where all have disappeared or are in full retreat.

With the strong earnings revision report along with an attractively priced stock market at 15x forward earnings compared to the last 10 years’ high of 40x, we are optimistic about the outlook for investors.

Source: Bloomberg, Marco Polo