Several uncertainties have weighed on investor sentiment since the beginning of 2022. Following the events of the military conflicts between Russia and Ukraine, investor sentiment was further dampened by ADR delisting risks. While talk of potential delistings is not new, the Holding Foreign Companies Accountable Act (HFCAA) implementation began in early March. Sentiment has improved after the CSRC’s proposal to improve cross-border cooperation. Although some of the US regulators’ concerns could be addressed, uncertainties remain until a resolution is reached. That said, the direct impact on our portfolios is insignificant, given our exposure to Chinese ADRs is minimal to none.

The spike of COVID infections in China towards the end of the first quarter also weighed on investor confidence, as the lockdowns may affect supply chains and further weaken consumption in the near term. If control measures are managed properly, we expect that China’s production activities will recover from the lockdown disruption. However, while we are optimistic about the containment of the virus, we continue to monitor the frequency of lockdowns and their impacts on the economy.

Despite the challenging environment, certain areas of the market remain resilient, particularly high-quality defensive companies. One of them is China’s telecommunication sector, which still recorded an average increase of 11.6%¹ during the first quarter. We believe the industry continues to benefit from higher pricing for 5G and is riding on the nation’s industrial digitalization trend.

With the continued roll-out of 5G in the country, the sector is expected to attract more mobile customers, which should further lift revenues in the next few years. As a result, industry revenue continues to show an improving dynamic. We also believe more value should be ascribed to the IDC (Internet Data Center) and Cloud business of telcos.

Sources:
1. Bloomberg, 28 April 2022

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This commentary has not been reviewed by the Securities and Futures Commission of Hong Kong. Issuer: Value Partners Hong Kong Limited. Investors should note that investment involves risk. The price of units may go down as well as up and past performance is not indicative of future results. Investors should read the explanatory memorandum for details and risk factors in particular those associated with investment in emerging markets. Investors should seek advice from a financial adviser before making any investment. In the event that you choose not to do so, you should consider whether the investment selected is suitable for you.

This commentary has not been reviewed by the Securities and Futures Commission of Hong Kong. Issuer: Value Partners Hong Kong Limited.