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The Chinese stock market, along with the rest of the world, had a torrid start to the year falling more than 31% between January and mid-March*. This was on the back of a difficult 2021, when the market fell some 21% due to regulatory intervention in some sectors by the government**.
But from the low on 15th March, the Chinese stock market had rebounded almost 40% by the start of July***. So, is this a sign that the market has bottomed or having fallen back slightly over the past six weeks, is more trouble ahead for investors?
The managers of Guinness Asian Equity Income fund have not lost faith in Chinese companies, with 36.4%^ of the fund currently invested in stocks listed in the country. “The fund’s Chinese exposure is predominantly domestically focussed,” they stated in a recent update. “Only Shenzhou International has an external exposure, being a supplier of fabrics to apparel makers like Adidas, Nike and Uniqlo.”
What’s more, nine of the top 10 best performing holdings in the fund during the second quarter of the year were Chinese or Hong Kong stocks. “Improving conditions lifted Suofeiya Home Collection and Chinese Overseas Land & Investment, which are both exposed to the Real Estate sector,” they continued. “These stocks are up 34% and 53% respectively this year. The other seven Chinese stocks were drawn from the Consumer Discretionary, Consumer Staples, Health Care and Utilities sectors. We would also note that the top 10 included all three of our mainland China listed A-shares.”
“The big story in Asia is the easing of conditions in China as the zero-Covid policy lockdowns imposed during the first half are lifted, The Guinness fund managers continued. “Inflation in China is more moderate than in the rest of the world, and our conclusion from this is that China’s monetary and cyclical position gives room to the government and central bank to direct policy toward reacceleration of growth, whereas the US and Europe are forced to direct policy toward fighting inflation and accepting the real possibility of recession.
“There is, of course, the probability that Chinese inflation pressures may emerge as demand recovers, but we think this will take time; the lockdowns were extensive and have had a significant impact on consumer confidence, so we believe this issue is unlikely to arise until next year, by which time higher interest rates and weaker demand elsewhere may have reduced price pressures.”
Michael Bourke, head of emerging market equities at M&G Investments, said in his Q3 outlook that China has been shunned by investors in recent months but, in his view, China’s stock market has become extremely lowly valued and by combining a rigorous fundamental approach with a consideration of valuations, some attractive opportunities can be found.
“We have been underweight China relative to the benchmark for many years, but this has been pared back as we have found more opportunities there as other investors have been more pessimistic about developments in the country,” he said.
“China’s recent reversal towards the end of the second quarter has been very narrowly led by large internet stocks, such as Alibaba, and has yet to broaden out to the wider market. This prompts the question whether it is a tech rally rather than a China rally.
“If investor sentiment towards the outlook for China continues to improve, we believe that some of our other Chinese holdings within other sectors should stand to benefit.”
In contrast to the Guinness and M&G managers, Jason Pidcock, who runs the Jupiter Asian Income fund, has a more negative view on China and has recently taken his holdings in Chinese companies down to zero because he has become increasingly uncomfortable with domestic Chinese politics and the souring of relations with other countries.
The fund still has indirect exposure to the Chinese economy through businesses in neighbouring countries that sell goods or services to China, but that is all. At this point, Jason has no intention of changing the benchmark of the fund, so he could invest in Chinese stocks again, but he has said that is unlikely for the remainder of Xi’s reign.
China undoubtedly has some major financial headaches to overcome, especially in the banking and housing sector which could impact its long-term prosperity. Geo-political issues are also mounting, and post-covid, many countries and companies are looking to diversify their supply chains away from China. So, it’s perhaps no surprise that some investors are wary.
But this could be a positive for many other countries in Asia. “There are a number of growth drivers in the region that do not involve China,” commented Ryan Lightfoot-Aminoff, senior research analyst at FundCalibre. “The most obvious is India. The domestic Indian growth story has a multi-decade runway and offers excellent demographics, huge potential and aligned politics. Elite Rated Alquity Indian Subcontinent and GSAM India Equity Portfolio are two options in this area.
“There are also opportunities within the ASEAN region,” continued Ryan, “particularly in countries such as Vietnam which is looking to take market share off China as a new manufacturing powerhouse.
“It is not in the Asia ex Japan benchmark, but Matthews Asia ex Japan Dividend has over 12%^^ allocation to the country, for example.”
*Source: FE fundinfo, total returns in sterling, MSCI China, 1 January to 15 March 2022
**Source: FE fundinfo, total returns in sterling, MSCI China, calendar year 2021
***Source: FE fundinfo, total returns in sterling, MSCI China, 15 March to 7 July 2022
^Source: fund factsheet, 31 July 2022
^^Source: fund factsheet, 30 June 2022