A Note from Keywise Capital, manager of the Milltrust Keywise China (UCITS) Fund

31 October 2017

The widely-watched 19th Party Congress of CPC concluded on Oct 25th with no surprises. Now the market has shifted attention from names of Politburo members to Mr. Xi’s future policies. While we don’t want to make too much early read about policy implications for the next 5 years, we would like to share with you two main takes we have.

Our first take is STABILITY. Stability has always been an important goal of the Chinese government and we believe it will continue to be a top priority. With Mr. Xi in clear control of the Politburo, we believe that the central government now has stronger political will and more tools available to manage both social and economic stability. We have always maintained a view that risks related to slowing down of growth, high debt ratio or a housing bubble in China are much lower than market perceived. With a more united and determined leadership, we think the probability of a hard-landing scenario is even lower for the next few years. Stability and continuity decrease uncertainties, and will provide strong support for investor confidence.

The second take is REFORM. If we categorize policies in first five-years under Mr. Xi as breaking vested interests through anti-corruption and power consolidation, we believe that in the next five-years it will be more about establishing a legacy and building a solid foundation for the future.   In the opening speech of the Congress, President Xi presented his new vision and goal for China to be a prosperous society with strong global influence (“the Chinese Dream”, ie, to make China great again). To achieve this goal, we believe that we will see more reform measures in multiple areas with related to SOE, housing, financial system, health care, education, poverty reduction, environment protection and etc. While the magnitude and speed of such reforms are yet to be determined, we believe that even marginal changes in these fronts will have significant implications and provide meaningful catalysts to the market.

How are we going to position in an economy characterized with both stability and reform? Our short answer is STOCK PICKING. Stability gives a solid background for good companies to take advantage of the demographic, urbanization and innovation trends. Whilst reform makes winners or losers. We believe that China will continue to shift from a growth model driven by investment to one driven more by service and innovation. In the transitional process, companies with strong business model and great management will continue to gain market share and reward investors greatly. For these companies, volatility gives buying opportunities.

Keywise is a Greater China dedicated manager with offices in Hong Kong and Beijing, and manager of the Milltrust Keywise China (UCITS) Fund. Our approach is to leverage our fundamental bottom-up stock picking to take advantage of market inefficiencies. We have successfully implemented this approach in the last ten years, and will continue to focus on stock picking to deliver supreme returns to our investors. Please feel free to let us know should you have any questions.