Fund managers have been steering clear of Chinese assets, despite the promise of lucrative returns, as worries over tensions between the superpowers deters longer-term investors.
Hong Kong’s Hang Seng has rallied 50% in the three months to the end of January, but incoming foreign investment has moderated and broker analysis attributes much of the rally to hedge funds seeking quick gains.
For more committed investors, the explosion of friction into outright conflict in Ukraine and President Xi Jinping’s consolidation of power in China have given pause for thought while Sino-US competition also heats up.
Several say the perceived danger of conflict across the Taiwan Strait has risen. Others note that war in Ukraine has solidified diplomatic and trade alliances, with China and the West increasingly on opposing sides – all of which represent new risks in parking money in the world’s second-biggest economy.
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“For the American investor, we have to consider whether we are enabling economic development of an adversarial government,” said Kevin Philip, partner at Bel Air Investment Advisors in Los Angeles, which manages $9.5 billion in assets for more than 350 high-net-worth families, individuals and foundations.
“For our investors who might have that concern, there are plenty of other opportunities away from China.”
Money flows imply others are also holding back and the price action shows months of gains are turning choppy and fickle.
Monthly data shows investment in China-focused equity funds hit an eight-month high of $15.4 billion in December but ebbed to $4.3 billion in January.
Money movement via the stock Connect scheme that allows foreigners to access companies listed in mainland China has also slowed this month to about 20 billion yuan ($3 billion), down from 64 billion yuan in January.
“Long-duration capital managers are somewhat hesitant to deploy fresh capital to work,” Goldman Sachs analysts said in a note based on investor meetings in the United States and Middle East, citing “an uncertain US-China geopolitical environment”.
That reluctance despite large potential returns – the Shanghai Composite rose 15% from late October to late January – prompts deeper questions.
Chinese Assets Downgrade Fears
The concern flagged by some is whether this is part of a structural downgrade for Chinese assets, said Will Malcolm, a Singapore-based portfolio manager at Aviva Investors.
His fund is overweight in Chinese stocks and has benefited from three months of gains. But he is now trimming that position, citing the need to be “a little bit more discerning” on exposure to different areas of the Chinese market.
Man Numeric, which manages assets for sovereign wealth funds, pension plans, foundations and endowments, has found that some institutional investors are rethinking allocations despite the opportunities on offer.
“There are some clients that are viewing the world as China in and ex-China when they are thinking about emerging markets,” said CEO Greg Bond.
China on ‘Charm Offensive’
Kiyong Seong, lead Asia macro strategist at Societe Generale in Hong Kong, expects the tune to change when the economic data starts to describe a robust recovery in spending and demand.
That could attract cash in a hurry, but the behaviour of large investors so far suggests that a large sentiment shift will be needed.
“China is going to do a big charm offensive trying to get investors back, but I think investors are hesitant,” said one US corporate pension fund’s chief investment officer.
“If people weren’t hesitant, with some of the incidents that have happened recently on the geopolitical front, you would have seen a lot more capital rush into China … people are just a bit wary right now.”
- Reuters with additional editing by Sean O’Meara
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