Investors tempted to buy into plummeting China stocks should beware the government interference that sparked the sell-off, according to numerous fund managers, who warned this will remain a feature of this market for the foreseeable future.
The MSCI China index has fallen almost 20% in the past month and is now down 18.3% this year, and 30.8% from its February peak.
Performance of index in 2021
Source: FE Analytics
The sell-off has been focused on China’s $100bn (£72bn) private education industry; deVere Group chief executive and founder Nigel Green said this followed a leaked government memo highlighting new and tougher regulations.
“This will prevent companies in the sector accepting foreign investments, raising capital through the stock market, or teaching outside school hours, among other rules,” he said.
However, the tough new approach from Beijing has also spooked the tech sector, which is already on high alert amid fears that the government wants more control over private enterprise.
Yesterday was the third day of plummeting values for China’s tech giants: Tencent was down 10%, Alibaba 7.7%, JD.com 8.9% and Meituan 17%.
Many investors may be tempted to use these falls as a buying opportunity, given the powerful long-term tailwinds working in China’s favour.
However, Green said this will only be a worthwhile strategy if they have the stomach to cope with further shocks on an ongoing basis.
“They must exercise extreme caution as the situation remains highly unpredictable and any further similar actions – or even suggestions – from Beijing will mean more sustained volatility and sell-offs,” he said. “It could be a long time until there is clarity.”
Ronald Chan, founder of asset manager Chartwell Capital, agreed with Green. He was unsurprised by the developments of the past few days, but said they have not made investing in China any riskier.
“Applying a western mindset to interpreting Chinese policymaking is too binary, and accepting the cultural and ideological differences is part of the investment thesis,” he said.
“Remember that markets are fickle and have a short-term memory; investors have had a phenomenal run over recent years, so those late to the party have only themselves to blame.”
He added that if investors were going to “dance with China” they needed to expect to “get their toes stood on occasionally”.
Chan claimed investors in Asia could protect themselves by avoiding the large caps that make up a massive proportion of local indices. Instead, he said the post-pandemic recovery story represented a safer way to play this market, as regional governments and business owners want to align themselves with domestic consumption via restaurant and retail spending.
“We like the quality small- to mid-cap companies where we can grasp what exactly is going on in their business, and see the catalysts for recovery and growth,” he added.
“Localised themes are also important, such as the broad spectrum of businesses that will benefit from borders re-opening.”
Finally, Chan recommended making your portfolio “bullet-proof” by taking an all-weather strategy.
“We like to blend income stocks and quality growth companies that typically move differently and give the portfolio some insulation from volatility and generate more asymmetric returns,” he said.
Kiran Nandra, a manager on the Pictet Asian Equities ex Japan fund, said that the lesson of the past 30 years is that there will always be political interference and volatility when investing in China, adding “there's nothing new in terms of what's going on there”.
When experiencing events like those of the past few days, she said it was important to take a step back and focus on the fundamentals and their likely direction of travel over the long term. Or even better, try to use these shocks to your advantage.
She said: “For example, when we had all this geopolitical noise around supply chains moving out of China, that was the biggest news of its day, but actually, it threw up opportunities: we bought into a logistics provider to take new stuff from A to B.
“The point is that when you have volatility, you should be able to pick individual stocks that could still do well out of that.”
Data from FE Analytics shows Pictet Asian Equities ex Japan has made 79.2% over the past five years, compared with 62.9% from the IA Asia Pacific ex Japan sector.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The $2.1bn fund has ongoing charges of 1.06 per cent.