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This Is Not The Time To Leave China, Managers Advise Maintaining Exposure

Everything that happens with the Asian giant is still usually analyzed with thick lines by many investors, since it is not easy to take off the emerging market label. And although wealth advisers have long advised having an exposure of at least 10% in China, the truth is that any correction in their markets is still lived with fear instead of an opportunity to enter what is on the way to being the first World economy.

This is what has happened this year, where a series of heterogeneous factors have impacted the Chinese markets. First was the fear of the outbreak of the coronavirus, which caused the confinement of several provinces; then there were torrential rains that affected one of the most important logistics centers in the country; and then it was the macro data showing a certain slowdown in growth.

Added to this was the regulatory pressure from the authorities on technology companies and the stricter control over the IPO in countries like the United States, where Chinese unicorns have found a sea of ​​financing in recent years, without forgetting the underground struggle that underlies with North Americans for leading technological supremacy.

This caused the Chinese stock markets to fall more than 40% in summer. The sales were indiscriminate, although little by little investors have returned to reduce losses to just under 4% in the case of the CSI 300 Index, which weights the performance of the main companies listed in Shanghai and Shenzhen.

Equity funds that invest in companies from the Asian giant, which have achieved annualized returns of 16% at ten years and 11.8% at three years, according to Morningstar data, have already reduced the falls to only 5% on average, which suggests that they can recover the positive trend last year, an exercise, the worst of the pandemic, in which they provided 28% on average. In fact, there are funds that earn 8% in the year, such as the Schroder ISF All China Equity.

With this outlook, what should an investor do: take advantage of it to increase its position in the Asian giant or reduce the weight in the portfolio as a precaution? Most of the firms consulted by elEconomista are clear: it is time to maintain the position and, depending on the risk profile, gradually increase it. But they also advise being more selective and betting on less glamorous sectors.

and that now we can buy with discounts that can reach 50%. Our option is to keep the exposure. In fact, in some cases of investments that we had planned we have also executed them, but thanks to the corrections we have finally acquired a much greater number of shares than initially planned “, says Josep Bayarri, investment director of Arquia Gestión.

“In no case do we believe that it is time to sell. It is an opportunity to buy in portfolios that have little or no exposure to this market. In portfolios that already have exposure, it will depend on the risk level of the same, but between 5% and 10% of equities can be a good starting point, “says Juan Pablo Calle, fund selector at Rentamarkets.

Mark Matthews, Head of Research Asia at Julius Baer, ​​gives another stronger reason to keep investing in China. “Its capital market has many companies that benefit from the expansion of the middle class. The wealth of Chinese households is around 40 trillion dollars. More than half is currently invested in real estate and less than 10% it is invested in stocks. The government has made it very clear that it will no longer allow speculation and rapid price appreciation, so we believe there will be a constant flow of wealth from households to stocks, “he says.

Political measures
The new regulation and the null or bad explanation by the Chinese government has been responsible for investors perceiving these measures as a new act of intrusion by the authorities, instead of being medium-term policies to try to cushion the inequalities generated by the Covid and longer term to counteract the demographic decline.

“Although many investors view regulation with fear, to a certain extent it is understandable that China tries to regulate certain sectors that, being novel, have developed in a brutal way. Summarizing a lot, the government’s objective is to improve equality in the country and, therefore, on the other hand, it tries to defend national security by monitoring a technological sector that has developed at a dizzying speed “, emphasizes David Azcona,

Virginie Maisonneuve, director of global equity investments at Allianz Global Investors, offers a fact: China consumes 35% of the world’s supply of semiconductors, but manufactures only 10%. “For a country so focused on national security, reducing the vulnerabilities of high technology will be its top priority. Investors who recognize this will be well positioned to use the inevitable volatility of the market to build strategic positions,” he stresses.

“The covid has exacerbated social inequality in China, a problem that local authorities tried to solve with a series of regulatory measures with the aim of reducing the cost of living and education throughout the country. These reforms of the education sector are clearly in line with the goals of reducing the costs of raising a child, “says Sean Debow, CEO of Eurizon Capital Asia.

For Pilar Cañabete, portfolio manager at Andbank Wealth Management, these reforms hide a search to favor the real economy. “The Chinese government may want to focus efforts and capital on increasing national productivity that solves the challenges of the real economy: achieving independence in semiconductors, new materials, and developing heavy technology before light technology. Xi Jinping, The president of China has assured that digitization is important, but the real economy is more important, “he explains.

One of the recommendations of the firms consulted is to maintain exposure to China but from another perspective, seeking to benefit from domestic growth and not so much from large technology firms. There is a category of funds focused on these companies, which focus on shares called class A, which in fact have been the ones that have suffered the least these months. And they are already positive, with an average yield of 1.5%

“China is vying to be a leader in many aspects of technology, such as semiconductors or artificial intelligence, but in a way that benefits ordinary people rather than just a few billionaires with unicorn IPOs. The recent push from unicorns is likely. reforms continue for a while while aligning the ambitions of its corporate giants with the country’s strategic objectives, to enable more uniform growth across all strata of society. However, we believe that it should not discourage investors from continuing to invest in it accounts for China’s sizeable economic footprint on the global economy, “said Aneeka Gupta, Research Director at WisdomTree.

“China’s growth is vastly higher than what we can achieve in the West and the equity and bond markets, as always happens, eventually reflect this. The recommendation is patience and seize the moment to expand position. Almost all sectors of the economy is experiencing the unpredictable and poorly communicated wave of reforms and regulation by the Chinese government and investors, domestic and especially foreign, are reacting with indiscriminate sales and hence, at this time the medium / long-term vision must prevail and continue trusting in what will soon be the largest economy in the world “, emphasizes Guillermo Santos, partner of iCapital.

As all this wave of regulations and policy measures seep into companies, caution should be the norm for investors. Richard Evans, a partner at Candence Investments, the specialty boutique of Mediolanum International Funds, notes that while recent declines in Chinese equity prices, especially for online companies, appear to offer short-term value opportunities, changes in the environment regulatory will have a significant and lasting effect on some business models.

“The Government has abandoned its passive support stance and is taking a much more active approach to how the sector will engage with the public, especially young people. Until the scope of this change is clarified, we remain cautious to time to increase exposure, “he stresses.

But Jaime Raga, head of customer relations at UBS AM Iberia, is overwhelming with the opportunity that China represents. “The Chinese stock market is already the second in the world and is rapidly catching up with the US. Just as a global investor would not want to be outside the US, the same is true for the Chinese stock market,” he concludes.

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