Updated: May 24, 2022
Our views and thoughts
In our view, the year-to-date market correction was driven by five major concerns, of which three of them (property, rate hike, geopolitical tension) were known and largely priced in by markets:
Five concerns on Chinese equities:
1. Property market: Home prices fell and sales slumped. Liquidity crisis at developers has led to defaults and fears of contagion that have reverberated throughout the industry and the wider economy. Sector policy has become favorable as government has already pivoted policies to stimulating demand, mortgage rates and down payments were cut by major banks. State Council’s Financial Stability and Development Committee (FSDC) shows support for the sector followed by the Ministry of Finance’s temporary suspension of the property tax trial for 2022, which is a major positive for the sector. We believe further easing on the property market may follow.
2. U.S. rate hike: The U.S. Federal Reserve (the “Fed”) raised interest rates by a quarter percentage point for the first time since 2018, and signaled hikes at all six remaining meetings this year. We view Hong Kong banks and insurance sectors as potential beneficiaries of rate hike. As of 28 February 2022, the Fund’s exposure in financials was 19.6%, compared to 16.4% at the end of 2021.
3. Geopolitical tension spill-over: Concerns over Russia-Ukraine geopolitical conflicts spilling over to China have heavily weighed on sentiments, adding pressure to Chinese equities for a worst-scenario type of correction.
4. Delisting fears: The U.S. SEC named 5 companies that it had identified as being non-compliant with the Holding Foreign Companies Accountable Act (HFCAA) on March 10, China ADR prices slumped. To recall, news on China ADR delisting is not new. Such implementation was also in line with the final rules that the SEC announced last year, where the 3-year grace period before delisting can be revisited or shortened. On the positive side, FSDC meeting shows support for overseas listing. Regulators in China and the U.S. have reportedly made good progress on the issue of Chinese stocks listed in U.S. markets. Chinese regulator was expected to provide more clarity on information that can and cannot be disclosed abroad. If that happens, it could be a positive development that Chinese ADR companies could rely on a clearer guideline on how to satisfy certain audit information to U.S. regulators. We are very mindful of regulatory risks of China ADRs. As of 28 February 2022, China ADR exposure in our portfolio was 2.6%, compared to 8.3% of benchmark (Chart 2). We believe that China and Hong Kong capital market participants (exchange, investment banks) stand to be beneficiaries as more companies come back to China-A / Hong Kong for listings. Also, companies with dual primary listing and eligible for southbound trading are in a more favorable position. Further expansion of eligible stocks to include “return-home” listings in the Southbound Stock Connect Program remains as a medium-term catalyst.
5. Internet regulation: Ongoing regulatory curbs on internet companies have been battering sentiment on the sector. The FSDC meeting offered some relief to investors as rectification work on large platform companies are going to be completed soon. Nevertheless, for the sector rally to sustain, more policy supports such as resumption of gaming titles approvals will be needed to restore confidence. We remain selective in the sector.
Policy fine-tuning for Covid-zero
• Chinese government published its latest treatment guideline4 for the virus, which includes relaxed quarantine rules for discharged patients from 14 days to 7 days and a higher bar for hospitalization. Mild cases don’t need to be hospitalized, marking sign of policy fine-tuning on Covid-19.
• We see value emerged in Chinese equities from fundamental standpoint. We believe that the current market movement was reminiscent of volatility seen in 2015/2016 (chart 3), which caused by the RMB’s
reform and implementation of circuit-breaker system.
• With supportive valuation in Chinese equities, we are positive for a medium to long term horizon. We currently adopt a barbell strategy which on one hand holds domestic Hong Kong equities with attractive dividend, while tapping into the growth areas on the other hand.
Three structural investment themes:
• Policy tailwinds: We have added to companies that may benefit from upcoming fixed asset investment (FAI) projects and offer better near-term earnings visibility in the transport and clean energy utilities sector. We may see further easing in China as we enter into the Q3/Q4 of 2022.
• Innovation: We maintain a positive view on China’s semiconductor sector due to self-sufficiency and domestic demand. We also like “growth commodities” in the materials sector such as lithium that have more sustainable pricing power other than spot prices movements.
• Consumption upgrade: Profit-takings are also seen in thematic areas such as Electric Vehicles (EV), EV companies that can pass on input costs are the potential winners. We continue to be positive on both onshore and offshore EV, assisted driving supply chain which enjoys strategic priority for government policy support.
*This is not financial advice, but purely for educational and training purposes.