Posted inEquities

China equity markets enter fragile phase

Reduced liquidity and the clampdown on tech giants is making investors nervous.
Chinese Political Party Emblem at the Forbidden City Entrance, Beijing, China

Despite China’s economy recording its fastest rate of growth since records began in the early 1990s, investors are being told to expect stock market returns to remain volatile amid an environment in which inflation is set to rise, reported FSA‘s sister publication, International Advisor.

Last week it was announced that in the first quarter of 2021 China’s GDP grew at a record rate of 18.3%, a jump that was largely anticipated given that the economy contracted in the same quarter last year as China went into lockdown.

However in the same period – after recording growth of 25.5% in 2020 – the MSCI China Index fell 1.35% in sterling terms as many of those highly-valued stocks with previous strong performance witnessed significant corrections during the quarter.

“With the recovery happening as expected, the market anticipates that monetary policy will be normalised, and liquid margins tightened,” said Lynda Zhou, a portfolio manager at Fidelity International. “Overall, market sentiment remains fragile as it tends to react slowly to positive news and quickly to negative news.”

Reining in tech firms

Looking to the second quarter, Zhou said that while the low base effect of the recovery will weaken, she still expects the Chinese economy to maintain a high year-on-year growth rate. She added the pace of this recovery in the coming quarters will, however, rely more on the recovery of the country’s service sector.

In terms of the factors behind the slowdown in market returns, Chris Metcalfe, investment and managing director at Iboss, said that in the first quarter the Chinese government seemed to be less accommodative to financial markets and begun reining in some of the largest tech firms.

“China has been very gradually decreasing liquidity and this has tempered the stockmarket,” said Metcalfe. “Whether it is right or wrong, they have also shown they will deal with their tech behemoths in a way the US never could.”

Despite this move Metcalfe does not believe investors should be overly concerned about China’s command economy, noting the government has the ability to increase liquidity again if they feel it necessary. He added the massive monetary stimulus from the US and other countries should also be beneficial for China’s exporters.

Yoram Lustig, head of multi asset solutions at T Rowe Price, added that because China has become such an important market in its own right, he is more focused on taking a differentiated approach to investing that goes beyond those mega cap names that are commonly found in China-focused portfolios.

“It is also important to be flexible when it comes to investing and looking at both onshore and offshore opportunities in China,” he said.

More than one set of figures

While boosted by weaker comparisons from this time last year, Adrian Lowcock, head of personal investing at Willis Owen, said China’s GDP growth in Q1 is a reminder to investors that the country is a “major engine room” for global growth.

“While investors should not read too much into one set of figures, especially as the long-term impact of covid on the Chinese economy is not yet clear, this is nonetheless further evidence that China cannot and should not be overlooked, and it should rightly increasingly feature in many people’s portfolios,” he said.

Breaking this down into fund ideas, Lowcock recommends the Schroder ISF China the FSSA Asia Focus funds as ways of getting exposure to Chinese growth.

In terms of the Schroder fund, he said manager Louisa Lo has over 25 years of experience investing in China with an understanding of the local culture.

“She has a growth style whilst remaining disciplined on valuations,” he said. “This has led to an actively managed fund where Lo will lock in profits from investments in the fund.”

Managed by Martin Lau, the FSSA Asia Focus fund has over 40% of its portfolio invested in China, Hong Kong and Taiwan, which Lowcock noted gives investors a broader exposure to the Asia Pacific region.

“The team apply a tried and tested method of investing by looking for companies that can deliver sustainable growth,” he said. “Lau has a flexible style and considers capital preservation as a foundation for long term capital gains.”

Part of the Mark Allen Group.