Red Dragon Fund:
The market has performed more or less in line with our expectations. The Shanghai Composite Index (SCI) rebounded to 2,100-plus points before retreating to 1,900. We believe things will get worse before they get better and are looking to reduce our holdings.
Much of the negativity has emanated from commodities, which are being rocked by the general global economic malaise. Beijing has said it will adjust retail prices of gas and petroleum products in early 2009 and implement a fuel tax at the same time. This means PetroChina (601857) and Sinopec (600028) can enjoy a generous premium for around three months. But this still hasn’t stopped investors fleeing from PetroChina.
Our other holding, China Unicom (601857), has begun transfering its CDMA network to China Telecom while also pushing ahead with WCDMA services. In addition, the regulator has decided to remove the differential pricing of inter- and intra- network messaging. China Mobile will suffer from this – due to the size of its user base – with China Unicom and China Telecom more likely to benefit. As such, we maintain our view that Unicom has strong fundamentals.
Capitalist Roader Fund:
The Capitalist Roader Fund was dampened by the tepid water of modest failure this month. While Anhui Conch Cement (600585) enjoyed a boost from ongoing excitement over an infrastructure-heavy stimulus package, poor economic data made investors think twice about the package’s ability to save the Chinese economy.
Industrial and Commercial Bank of China (ICBC, 601398) fared slightly worse, despite a capital injection from its major shareholder, Central Huijin. The goal was to restore confidence in the A-share market, but investors didn’t buy it.
Since our fund’s performance has roughly tracked the index this month, last month’s small gains mean we’re still slightly ahead. The fund has fallen 40.8% since June, against the SCI’s 42.8%.
The conservative attitude burned into us by the last six months has left us looking for clearer signs of what to expect in 2009. The conventional wisdom is that things could start turning around toward the end of the first half. We’ll be watching closely.