Chinese equities suffered from a mix of events during the second quarter that has resulted in downward pressure and market weakness. In June alone, we saw the currency (RMB) depreciate by almost 4% vs the US dollar and the market lost 8% during this month alone. Defensive names lost alongside the market. The current Bloomberg estimated P/E for the index, the Shanghai composite, is now just under 11 while the estimated earnings growth for the same index is over 9%.  The current political climate has put significant pressure on the market given the uncertainty going forward where China-US trade tensions escalated. To illustrate this part, on June 18th, the White House issued a statement instructing the US trade representative to consider imposing additional tariffs on Chinese goods. The Shanghai Index fell 3.7% the following day.

Monthly economic data points have missed market estimates compounding overall uncertainty. Beijing’s general posture remained hawkish and conservative.

Looking ahead: China’s economy is likely to grow at a stable and healthy pace supported by record consumption from the1.4 billion population, supported by a healthy national debt to GDP ratio and a stable political environment.  The inclusion of China A-shares in the MSCI Emerging Market Index began on 1 June and we should expect to see increased flows into the market in the future.

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