As global markets shudder, investor sentiment on China ranges from exuberant to extremely cautious

Ever since Russia invaded Ukraine, investors have been rethinking China. The result? Many opinions.

Indeed, some of the most influential asset managers remain bullish on China, even as big allocators continue to pull back amid geopolitical tensions, politics and the country’s zero-Covid policy.

The polarized sentiments on investments in China are reflected in the flow of funds data. In the last week of February, net inflows into Chinese stock funds fell to $890 million from $1.2 billion the previous week, as investors began to assess whether Western sanctions against Russia could be extended to China, according to data obtained by EPFR for I. From there, the funds rose again until the current reversed in outflows of $3.6 billion when China announced a lockdown of the entire city of Shanghai after a spike in Covid cases. Then, during the last week of April, net inflows rose sharply to $4.5 billion after China ended a controversial regulatory crackdown on the country’s property and technology sectors.

Institutions were the main driver of fund flow volatility, according to EPFR, showing how sensitive Chinese investors are to broader macroeconomic shocks. In addition to the real economic risks, there are also allocators who take a tough stance on China for political reasons. In early April, the Florida State Board of Management of the $250 billion public retirement system announced that it had stopped funding new investment strategies in China after Governor Ron DeSantis considered how to move away from countries that are “hostile to American interests.” Earlier this year, Yale’s endowment came under pressure to investigate its holdings in China for possible human rights issues, according to the Yale Daily News. The West Virginia State Treasury also dropped its partnership with BlackRock over its stance on China and climate risks.

But for China’s optimists, the market still offers great opportunities despite all the obstacles.

On the one hand, investment professionals with geopolitical experience argue that the West is unlikely to sanction China as it did Russia. “I think it’s important to make a distinction between what happened with Russia and what could happen with China,” said Andy Rothman, chief investment strategist at Matthews International Capital Management and a former US State Department foreign service official. .”[China] He hasn’t criticized Putin the way some Western countries have, but I don’t think the US or the EU would impose sanctions on China just because of that.”

Rothman added that China only risks Western sanctions if it violates US and EU restrictions on Russia. “There is no evidence [China has] done that, and I don’t think so [it] going to do,” he said.

Siguo Chen, portfolio manager at Royal Bank of Canada Asset Management, agrees that China is unlikely to make aggressive geopolitical moves that would trigger the same vehement responses from the West. “China is a much larger and much more integrated economy than Russia,” he said, adding that conservative Chinese leadership should “provide some comfort” to investors seeking stability.

China’s response to Covid is another key concern for investors. Since the beginning of March, a new wave of covid has swept through Shanghai, where more than 25 million people have been subject to strict confinement rules. Many investors are concerned that the continued zero-Covid policy will disrupt global supply chains and slow economic growth in China, which already faces a severe demographic challenge.

Rothman acknowledged that China has made a mistake in insisting on absolutism with Covid cases, but said the Chinese government is often “pragmatic and realistic” in correcting policy implementation mistakes. Furthermore, he said that compared to the early days of the pandemic, China now has a better public health playbook to follow. “In the early days, we just didn’t understand the science,” she said.

Ferrill Roll, chief investment officer at Harding Loevner, warns investors against knee-jerk reactions to public health crises in emerging markets, especially China. During the SARS outbreak in 2003, Harding Loevner quickly pulled money out of Hong Kong, only to find that three of the four companies he spun off did extremely well over the next 18 months. Having learned its lesson, the company kept its investments in China when the coronavirus hit Wuhan in early 2020. That decision paid off, he said, as Chinese stock markets delivered huge gains in 2021.

Roll added that there are still attractive investment opportunities in China and the broader emerging markets. “There are a lot of high-quality growth businesses in the health care, technology, consumer discretionary and communication services sectors, including all the search engines, the Internet and the entertainment companies,” he said.

The presence of retail investors is another advantage for the institutions. Unlike the US, where institutional investors dominate, a large retail investor base in China offers many opportunities for mispricing.

Ginny Chong, head of China equities at asset manager Mondrian, said most retail investors in China’s domestic market are not motivated by fundamental factors. They tend to trade at high speed, often driving stock prices to extremely high or low points, offering shares at a discount to attentive investors.

There is “more trading than investing” in an inefficient market like China, which is good news for wealthier institutional investors, said Jason Hsu, founder and chairman of Rayliant Global Advisors. The best approach for a market dominated by retail is to take what Hsu calls a “quantitative” approach, which is a combination of fundamental and quantitative methods.

With Chinese stock markets dipping into bear market territory, Hsu is pragmatic about risks, at least in the short term. “If you ask [whether] China is worth investing in, I would say it is certainly a better investment today than it was a year ago,” he said.

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