During the past two months, global investors have been selling China-focused equity funds because of concerns around the Chinese government’s new regulations on the economy, and a surge in the covid Delta variant.
“The onslaught of regulatory measures coming from the government has created uncertainty and challenged successful business models,” Devan Kaloo, global head of equities at ASI, said in a statement.
Companies with monopolies, tech firms, private education companies, online insurers and luxury property firms are all under scrutiny and, in some cases, new regulation, he said.
In education, the government is uncomfortable with private sector involvement. As a result, companies offering services such as private tuition have suffered.
The property sector will face headwinds as the government has identified affordable housing as a priority, and so companies will have to adapt to new regulations.
Role of private companies
“But the private sector remains extremely important [for the country] and there is a renewed focus on innovation, a key priority for the Chinese government,” he added.
China is a risk, but no more than five-to-10 years ago, and the risks have now been priced in and there is value in some sectors, argues ASI. Currently, the MSCI China A-share index trades at a 50% price/book discount and 35% price/earnings discount to the S&P 500, the firm’s research finds.
However, investors need to invest on the “right side of the regulatory framework” and in companies able to adapt, said Kaloo. “The government is looking to promote innovation, green technology, affordable healthcare, improved livelihoods and domestic consumption.”
Investors should focus on domestic brands as well as homegrown technological leaders in areas such as the semiconductor industry.
E-commerce companies remain “great value” and should do well longer term, as they still have a role to play in China’s development, said Kaloo.
Meanwhile, the “green revolution” in progress in China is also worth paying attention to. The country has demonstrated a strong commitment to net zero, so an overhaul of the utilities sector is underway, he noted.
“You can now have a conversation with every Chinese company about ESG and you can talk to the regulators about this too. It’s very different to 10 years ago,” Kaloo said, adding that unfortunately most Chinese companies still have relatively low ESG ratings as they don’t disclose enough information.
Overall, the pain felt by the financial markets is “transitory and ASI continues to see long-term opportunities,” said Kaloo.