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China and emerging market funds plummet in July as tech crackdown surprises

02 August 2021

Trustnet reveals the best and worst performing funds over the past month, against a backdrop of rising inflation and a regulatory tightening in China.

By Gary Jackson,

Head of editorial, FE fundinfo

Investors in Chinese stocks were hit with heavy losses in July, FE fundinfo data shows, while those holding index-linked gilts realised some of the month’s highest gains as inflation worries continued. 

As the chart below shows, the big story of the month was the fall of more than 11% from the average IA China/Greater China fund.

Relatively big declines were also seen in peer groups such as IA Global Emerging Markets and IA Asia Pacific Excluding Japan, where Chinese equities are popular holdings.

The fall in Chinese stocks was sparked by regulatory crackdowns in areas such as music licensing and private education, which led to a sell-off in online and tech names.

Performance of sectors in Jul 2021

 

Source: FE Analytics

Andrew Rees, investment companies research associate at Numis Securities, said: “Chinese markets experienced significant volatility as Chinese technology and education stocks faced a more aggressive stance from regulators. The long-term implications remain difficult to assess and markets stabilised somewhat, but further volatility cannot be ruled out.

“The changes to the education sector were more extreme than most expected, and several businesses models are in tatters, but we expect this to be the exception rather than an approach replicated across sectors. We would expect changes in the technology space to be more measured. Innovation remains a key pillar of China’s five-year plan, and therefore we do not expect it to seek to regulate the internet sector out of business.”

The month’s best return, on a sector level, came from IA UK Index Linked Gilts. The average fund in this peer group was up 6.5% as investors continued shore up portfolios against the impact of higher inflation.

 

Source: FE Analytics

A quick look at the list of the best-performing individual funds in July shows how strong index-linked gilts were last month – nine of the top 25 funds reside in the sector.

Inflation concerns have been growing for some time on the back of massive levels of economic stimulus to tackle the pandemic and supply bottlenecks caused by 2020’s lockdowns.

AXA Sterling Index Linked Bond was July’s best IA UK Index Linked Gilts fund with a 7.5% total return, followed by Janus Henderson Index-Linked Bond (6.9%) and Insight UK Index Linked Bond (6.9%).

However, the month’s highest returner overall was the VT Gravis UK Listed Property fund, with a gain of 8.2%, while another four funds from the IA Property Other sector made it into July’s top 25.

 

Source: FE Analytics

Somewhat predictably, the very bottom of the Investment Association universe was dominated by China. Even the few of the above funds that don’t reside in the IA China/Greater China sector have a heavy weighting to China in their portfolios.

Invesco China Equity had the worst month with a fall of just over 17%, but several of its peers weren’t too far behind.

Indeed, the 41 worst performers all have significant exposure to China, with the trend only broken by iShares Oil & Gas Exploration & Production UCITS ETF’s 10.7% fall in 42nd place.

But after this, it’s back to China, Asia and emerging market funds posting the industry’s biggest losses in July - they accounted for the vast majority of the month’s 300 worst funds.

Of course, the performance of a single month doesn’t give investors much of a broad view of what’s happening in markets and tables of monthly returns can be full of specialist strategies. With this in mind, we’ll end with article with a snapshot of the best and worst performers of 2021 to date, to offer a wider view of how the year is panning out.

Performance of sectors over 2021 to date

 

 

Source: FE Analytics

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.