The Chinese government wasn’t kidding when it revealed its intentions to stimulate its economy last month.
Or at least Wall Street didn’t think it was messing around.
Even after dropping over 10 percent from their peak on Monday, China-focused large-cap equity ETFs are still aloft, up almost 30 percent since the government’s late September announcement. And that’s got portfolio managers and wealth managers worldwide wondering whether they should be chasing the Chinese dragon.
Stephen Kolano, chief investment officer at Integrated Partners, maintains exposure to Chinese equities in client portfolios primarily through emerging markets (EM) ETFs and mutual funds. That said, he does have some exposure to Chinese ADRs in a few individual stock portfolios with a global mandate.
While Kolano is obviously not avoiding Chinese stocks, he has been been underweight EM as an allocation and within that allocation maintains a preference for India over China.
“The real estate issues in China are large and it is uncertain as to their extent and how deep the issues run in terms of vacancy rates and their impact on debt underwriting that occurred years ago to finance many of the projects at much lower costs of capital than we are seeing today,” said Kolano. “Additionally, many of the real estate issues sit at the municipal and regional levels which adds an additional layer of opaqueness to the problem.”
Furthermore, Kolano believes that due to post-COVID supply chain shifts, China’s manufacturing capacity will not be the same engine of growth it once was and won’t be able to help alleviate the overall economic impact of the property market issues.
“It seems as though the trend in China has been for more government intervention than in the past which further adds to the uncertainty of China’s current economic trajectory, combined with a trend of below expectation economic growth in the last few years,” said Kolano.
Similarly, Michael Rosen, managing partner and chief investment officer at Angeles Investments, is currently structurally underweight Chinese stocks, although he admits he has taken tactical, short-term overweight positions in the past.
His rationale for holding a structural underweight in Chinese equities is that the country shifted over 5 years ago to greater government intervention in the economy, directing businesses to emphasize the political policy priorities of the CCP at the expense of shareholder return.
“Unless and until the government reembraces the capitalist policies that propelled the extraordinary accretion of wealth in the economy, we will likely remain structurally underweight Chinese equities,” said Rosen.
Elsewhere, Will Sterling, partner at TritonPoint Wealth, does not have a target strategic allocation to Chinese stocks and has not employed a tactical tilt either.
“While the MSCI China Index is up 28.5 percent over the last month, it is only 1.25 percent over the past five years. Over the same time-period, the S&P 500 is up 114%. As important as return as a decision point as to whether an asset warrants inclusion within a portfolio, the portfolio volatility in this case does not support a tactical allocation,” said Sterling.
He adds that the five-year standard deviation of the MSCI China Index is over 28, which is 50 percent more volatile than the S&P 500 over the same time-period.
Said Sterling: “Chinese equity exposure has not been for the faint of heart.”
Meanwhile, Maya Joelson, wealth manager and global investment strategist at Savvy Advisors, would not invest in any Chinese stocks, due to the deteriorating relationship between China and the West.
“I still believe in the growth of emerging markets, but want to choose countries like India instead of investing in broad emerging markets funds,” said Joelson.
On the more bullish side, Rory O’Hara, founder and senior managing partner of Ausperity Private Wealth, a partner firm of Sanctuary Wealth, says he recently switched from an ex-China ETF to an actively managed mutual fund that includes Chinese equities. O’Hara is bullish “due to the recent stimulus measures announced by the Chinese government,” which he believes can drive continued positive returns.
Finally, Tim Harder, CIO, Quotient Wealth Partners, made the determination in July that Chinese stocks were as unloved as they would ever be. As a result, we removed the EMXC ETF (iShares emerging markets ex-china) from his allocations and replaced it with the IEMG ETF which includes China, while increasing the overall emerging markets allocation.
“This was less about a general sense of optimism on China and more a realization that there was limited remaining downside risk and any good news would be rewarded,” said Harder, adding that the move is also a way to diversify away from out US technology stocks.
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