Faced by a wall of geopolitical and macroeconomic uncertainty — a zero-COVID policy, an increase in tensions with the US, tightening regulatory scrutiny and the weakness of the real estate sector — investors in the world’s second largest economy have spent much of the past year looking for a better home for their capital.
Equities were hit particularly hard. The selective Hang Seng China Entreprise — the benchmark index of the Hong Kong Stock Exchange — for instance, fell 22 per cent in 2021. The so-called BATs stocks, the darlings of growth investors, saw similar declines.
But there are signs that the tide may be beginning to turn. In April, China’s central bank introduced a wave of measures intended to support the economy. Among these was a reduction in the levels of reserve requirements for banks along with a record cut main in its mortgage interest rate. There are also indications that a previous regulatory crackdown on Chinese tech stocks has run its course.
Now, investors have begun to respond accordingly. Foreign inflows into China’s stock market logged in at roughly 40 billion yuan ($6 billion) this year, putting holdings above levels in early March when the sell-off began, according to Financial Times data. Likewise, the benchmark CSI 300 index of companies listed on the mainland has climbed 13 per cent since its low for the year in early May.
For investors who stayed their course during the China sell-off, this marks something of a watershed. Despite the earlier headwinds, not all managers and analysts felt it was time to stop investing. There were those that believed this was precisely the time to bet on the Asian giant.
This type of behaviour is known in the investment world as being contrarian. That is, those savers who invest in the opposite direction to the general sentiment of the market. When the majority of market players buy, the opposing investor sells. Whereas if a bear market occurs, the contrarian investor is dedicated to looking for opportunities to buy.
For more than a decade, being a contrarian has been synonymous with investing in value. Today, things are less clear cut. The sell-off in Chinese stocks offered us an excellent opportunity to buy higher-quality stocks at bargain prices.
Currently, the main positions in the fund’s portfolio are held by the technology company Samsung Electronics, the e-commerce giant JD.com, the search engine Baidu and the semiconductor companies ASE Technology and TSMC. If we look at the sector exposure, information technology (with a weight of 25.90 per cent), discretionary consumption (20.70 per cent) and financial (10.95 per cent) stand out.
Jonathan Pines, portfolio manager Asia ex-Japan, emerging markets strategy at Federated Hermes
