The Schroder China Asset Income Fund has increased its onshore exposure to about 20% as of May – 13% in A-shares and 7% in onshore bonds.
To compare, when the fund was first launched in August 2016, it had negligible exposure to A-shares and 11% in onshore bonds.
Tang said he has been hedging the downside risk to H-shares (China shares listed in Hong Kong) with put options and tilting more toward onshore A-shares and fixed income.
He believes the recent run of China offshore equities may pull back.
China offshore equities have outperformed well compared to the mainland-listed stocks, he explained. The MSCI China Index, without A-shares at the moment, has gone up 25% year-to-date, versus MSCI China A Index’s 6%, both in US dollar terms.
“Starting last year, there have been quite a lot of southbound flows through the Stock Connect scheme to Hong Kong stocks amid the anticipation of the RMB weakness. While the currency depreciation pressure is gradually reducing, some of the money might [return] to the onshore markets,” added Jack Lee, head of China A-share research.
Lee said he likes specific A-share companies.
For instance, home appliance companies with a large market share or white liquor or baijiu companies as a play on mass consumption in China, as well as high-end component suppliers for Apple’s iPhone products.
Banks offload fixed income
The RMB is likely to remain stable in the next few months, given the politburo meeting to be held in the fall of this year, noted Angus Hui, Asian fixed income fund manager. Also, a possible sustained slowdown of the US economy means there is less immediate pressure for the Federal Reserve to raise interest rates.
He sees opportunities in bank deleveraging.
As Chinese banks are pushed to reduce debt, some banks are selling quality fixed income assets to manage the off-balance sheet exposure, also known as shadow banking, Hui said.
“Government and corporate bond yields are rising, sometimes by 100-200 basis points. They can be good opportunities. Some short-dated corporate credits, rated AAA onshore and investment grade internationally, have also up to 4.5-5% yield which we think, in the [low-yield] environment today, is pretty attractive.”