Pro fund buyers ready to take chances in ‘seismic’ China shift

China’s sweeping regulatory crackdown has upended how investors approach the country, but not everyone is giving it a wide berth.

Professional fund buyers say China’s sweeping regulatory crackdown has caused a ‘seismic’ shift in how they plan to invest in the country, but broadly agree the time is ripe to look for novel ways to latch onto its still promising growth prospects.

A deepening debt crisis at once-mighty property developer Evergrande is the latest headline troubling jittery international investors, but fresh incursions against gaming and consumer finance have taken further chunks out of internet giants like Alibaba and Tencent in the last week.

‘The China regulatory crackdown is something we have been watching closely and what initially appeared to be targeted around educational technology has clearly broadened significantly,’ said Edward Park, chief investment officer at wealth manager Brooks Macdonald.

Miton Global Opportunities (MIGO ) manager Nick Greenwood said these risks had always lurked behind the bull market of recent years.

‘The MIGO team takes the view that when a dictatorship is in control then the rules can change swiftly, so to a certain extent getting involved is a speculation rather than an investment. That uncertainty needs to be priced in which has not been the case recently,’ said Greenwood, whose £101m investment trust hunts for attractive opportunities among other closed-end funds.

The Nasdaq Golden Dragon China index of companies listed on the index, heavily skewed to tech and other under-fire sectors, has now nearly halved – down 47% in dollar terms – from its February peak.

The long march to prosperity

Others take a more optimistic stance, however, arguing changes to protect local consumers’ interests in areas like housing and education could have long-term benefits for growth too.

‘Ultimately, we take the view that China is still investable but on the long road to Chinese prosperity, collateral damage [in some sectors] is likely to be unavoidable,’ said Paris Jordan, an analyst in the multi-asset team at Waverton, an investment manager for charities and financial advisers.

She pointed to recent comments made by George Soros. The legendary investor said those buying back into China are in for a ‘rude awakening’ as President Xi Jinping regards ‘all Chinese companies as instruments of a one-party state’, reserving particular criticism for BlackRock as the giant asset manager pushes into the country.

‘This is in contrast to a number of Chinese fund managers who are unsurprised about the recent crackdowns,’ said Jordan, adding that the Chinese Communist party’s priorities on equality and regulation had been well flagged.

The Waverton analyst expects further volatility but also noted the risk of ‘overextrapolation’: assuming specific regulatory interventions will affect the market uniformly. The firm’s strategy is to invest with what she called the ‘policy tailwind’; they have reassessed portfolios to ensure they align with long-term growth areas and local priorities, such as biotech, semiconductors, and green energy and transport.

In Park’s view, recent moves are ‘not unilaterally anti-business or anti-foreign investment’, while Chinese authorities supporting greater dialogue with US securities regulators is one potential positive development. Though Brooks Macdonald has not allocated more to China on the back of recent weakness, the firm has been rebalancing in portfolios from better-performing regions like the US.

Opportunities emerging

Regulators’ eleventh-hour decision to quash the flotation of Ant Financial, Alibaba’s fintech arm, last November and actions against founder Jack Ma (pictured) essentially kicked off the current regulatory wave. That crystallised at the start of this week with Beijing announcing plans to break up its dominant Alipay app. Alibaba’s US-listed shares have slumped about 5% since to $160, a level last seen in June 2019.

Tencent has fared not much better, sliding well over 10% in a week since the state’s latest broadside against profits in the gaming sector, although plenty of areas beyond tech have become targets. Gambling is the latest, with casino operators such as Wynn Macau plunging as much as 30% today as the government kicked off a regulatory overhaul in the territory.

Paul Craig, portfolio manager at Quilter across the Cirilium multi-asset fund range, said these efforts reflected China trying to build a ‘better’ society, but this has created opportunities too.

‘It has seen the debt bubbles and impact of social inequality from the western world and has thus decided to act and take some of the froth out of the market,’ he said.

‘As a result, we have undergone a seismic shift in where to invest in China. We believe the focus needs to be on the domestic market if you are to invest in the country, and away from the mega-cap, internet-focused stocks.’

They have added to the China weighting in Cirilium recently taking them back into line with global markets. Craig tipped the Wells Fargo Emerging Market Equity Income and Fidelity China Consumer funds as favourites.

‘The Wells Fargo fund, in particular, avoids exposure to technology so has good exposure to the more domestic elements of the economy, while the Chinese consumer is a trend that is still there,’ he said.

Active approach key

Rory McPherson, head of investment strategy at Punter Southall Wealth, said they were ‘encouraged’ by the pivot towards more sustainable growth and were considering rebalancing towards China from more expensive areas of the global market.

He said there was clearly a move to rebalance inequalities resulting from a decade of asset price rises, notably in housing and technology shares. Given how prevalent those sectors were in passive benchmarks, they believe in ‘an active approach is key’ within the region. The firm favours ‘specialists’ such as Matthews Asia, which runs both regional and China-specific funds, and the Mirae Asia Great Consumer  fund.

‘With Matthews, we get exposure to the small and mid-cap areas of the market, which are attractively valued and also benefit from the cyclical recovery we expect to come,’ McPherson said.

While MIGO has little China exposure currently, London’s trio of dedicated China equity trusts – £248m new entrant Baillie Gifford China Growth (BGCG ), £1.7bn Fidelity China Special Situation (FCSS ) and £448m JPMorgan China Growth & Income (JCGI ) – have all slid markedly from trading at or above the values of their portfolios to discounts. Greenwood said he hadn’t spotted any ‘bargains’ yet, but was monitoring the situation in case sentiment deteriorates further.

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