Ollie Smith: Now, if you’re an investor in China, you may rightly have the jitters at the moment, and the latest round of protests in the country might not be helping. But is there a case for revisiting China equities? Here to tell me more is manager research analyst, Lena Tsymbaluk.
Lena, tell me about this. Is there a case for revisiting China equities?
Lena Tsymbaluk: Good morning, Ollie. As you may know, Chinese equities have largely been underperforming global equities over the last two years. MSCI China Index has fallen 27% over the period when the MSCI World Index has been up 11%. So, what are the key issues affecting Chinese economy at the moment? To name a few, its zero COVID policy, recent regulations which badly affected certain industries such as technology, property and education, and finally, geopolitical tensions between China and the U.S.
OS: So, how are fund managers reacting to this? How are they positioning their portfolios in light of what’s going on in the country?
LT: Yeah, there are some managers who are still very cautious about China. For example, Bronze-rated J O Hambro Global Emerging Markets Opportunities Fund is one of them. They were 7% underweight in China at the end of October as the team was concerned about regulations as well as the country’s growth. In the Asia space, Bronze-rated Schroder Asian Alpha Plus had 18% underweight in China in November versus its benchmark. This was due to all the issues listed above, plus the managers didn’t believe the market has derated enough to increase their exposure.
OS: And then, finally, what are the more sanguine fund managers saying about the country? What’s the outlook?
LT: Yeah. Among the managers who are positive on China, and there are those managers, it’s Bronze-rated T. Rowe Price Emerging Markets Equity Fund. It had 30% in China at the end of October compared to 27% in MSCI Emerging Markets Index. This was based on the team’s view that Chinese economy had gone through its worst and should improve in the next few months. Their China exposure was largely a reopening trade as they believed domestic consumption should come back when economy stabilizes. As a result, the team likes consumer names like Yum China, Meituan, Alibaba and Midea Group. Within global equities, the standout support of China is Silver-rated Baillie Gifford Long Term Global Growth Fund. At the end of October, the fund had 17% exposure in China compared to only 3% in the MSCI World Index. The team continues to see China as a source of growth and innovation. They also believe there is a softening of regulatory crackdown. They think that internet companies will remain the key driver of the Chinese economy, and that’s why they continue holding names like Alibaba, Tencent and Meituan and all those names that they’ve sold out recently. In addition, they invest in a few high-growth companies which have the governmental support such as Nio and Bilibili.
OS: Fantastic. For more on China and the outlook for emerging markets, check out our Special Report Week on the outlook for 2023. That’s coming up in a couple of weeks. Until then, my thanks to Lena. I’ve been Ollie Smith for Morningstar.
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