HEAD-TO-HEAD: China Universal Value Selected versus E Fund Kexiang

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Chloe Qu, Morningstar

Introduction

Chinese stocks endured a challenging 2021 as pre-emptive monetary policy tightening and a regulatory crackdown on technology and educational companies triggered an economic slowdown and hit corporate earnings, noted Luca Paolini, chief strategist at Pictet Asset Management.

However, for the year of Tiger, their prospects are improving. Leading indicators are picking up as is China’s credit impulse – or the volume of credit flowing into the economy as a proportion of GDP, Paolini said.

An increase in that credit gauge is particularly significant as it tends to foreshadow an increase in economic growth.

Meanwhile, the People’s Bank of China has shifted its monetary policy stance decisively to easing, supporting the economy with, among other things, cuts to reserve requirement ratios and reductions in both official and loan reference rates.

What’s more, Beijing’s regulatory clampdown last year on its most powerful corporations, which wiped out billions of dollars in value from the stock market, appears to have paused for now, according to Paolini.

All of this should allow Chinese equities to recoup losses after last year’s 20% decline and narrow the valuation gap with their counterparts in the coming months, he said.

For equity investors, the shares of some Chinese companies that primarily serve their home market have the potential to perform relatively well next year, Wenchang Ma, portfolio manager of China equities at Ninety One, said in a report.

Within the asset class, focusing on domestically-oriented Chinese companies may be a smart way to manage one of the likely big risks of this year – the chance of a flare up of geopolitical tensions, particularly with the US. “Should Washington and Beijing get their claws out over trade and national security, home-focused businesses are more likely to be shielded from the heat,” said Ma.

However, care is needed on valuations. Ma believes some Chinese companies are trading on excessive multiples, way ahead of their earnings potential.

That said, with improving earnings momentum and market interest widening into a broader array of stocks, against a more positive economic backdrop, there should be good opportunities. Picking stocks using a bottom-up approach can help uncover investment ideas across the wide spectrum of industries that China’s dynamic economy has to offer, he said.

Against this background, FSA asked Chloe Qu, senior manager research analyst at Morningstar, to select two domestic Chinese equity products for comparison: the China Universal Value Selected Fund and E Fund Kexiang Fund.

Source: Morningstar. (Data in RMB; *US dollars, 27 January 2022)

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