The Chinese “revolution” cost investors $ 3 trillion. So why aren’t they afraid?
Even as authorities destroy the status quo for tech, education, and other private companies, drawing comparisons to Mao Zedong’s Cultural Revolution, some of the biggest names in asset management say it’s still the right time to invest.
The “intensity” of the measures “will fluctuate,” BlackRock strategists wrote in an August research note. “Chinese authorities are likely to balance their regulatory agenda with a desire for economic stability, and the intensity of regulatory crackdown may ease amid slower growth and market volatility.”
A large shakedown
The crackdown over the past year has shaken many businesses and could also dampen economic growth. The service sector contracted in August for the first time in 18 months.
The MSCI China Index, which tracks Chinese large and mid caps, has fallen more than 13% this year. In contrast, the MSCI World index rose by more than 16%.
“While we have championed China’s impressive technological advantages and achievements on a global scale for years … we believe the regulatory overhang is unlikely to dissipate anytime soon,” Bank of America analysts wrote in July.
Soros wrote that Xi’s version of the Communist Party acted as an “updated version” of the one led by Mao. “No investor has the experience of this China because there were no stock markets in Mao’s time.”
A model for the world to follow?
Paolini de Pictet, however, is not worried.
In a way, he said, the crackdown is a “late response” to the breakneck pace at which many Chinese companies have grown and innovated. He predicted the rest of the world would follow with tough regulations on data use and Big Tech dominance.
“Regulatory risk has increased, but it is now widely reflected – on our metrics,” Paolini said, adding that China is the third cheapest “major” stock market and “by far the most oversold.”
BlackRock strategists echoed this reasoning, writing that Chinese management sees the measures as “necessary to curb industries that have grown rapidly and are lightly regulated.”
“We maintain our strategic preference for Chinese assets,” they added.
Even Goldman Sachs – who recently estimated that the crackdown wiped out $ 3.1 trillion in market value for Chinese companies around the world, half of which were for tech companies alone – remained optimistic.
Investment bank strategists wrote last week that the “uncertain business environment” was unlikely to didn’t weigh on buying too many Chinese stocks, at least not on the mainland.
Companies that register overseas may be in a more difficult time, as US and Chinese regulators have restricted companies that register in New York. Even then, however, Goldman analysts have emphasized the “long-term value” for these companies – they just want to “wait for more regulatory clarity” first.
China has “great potential for economic growth and profits in a global context,” the strategists wrote.
The bank acknowledged in a July research note that stocks have been hit hard by the crackdown, adding that some of his clients have even questioned whether Chinese markets have become “non-investable.”
But they said they believe “extreme regulations” are unlikely to spread to all sectors.
The government has supported the development of “foundational technologies”, such as renewable energy and 5G grids, and “would be pragmatic in balancing social / ideological goals and capital markets in industries not sensitive to the plan. social over time “.
According to Victoria Mio, director of Asian equities at Fidelity International, selling “indiscriminately” has also created beneficial investments for those who think longer term.
“Despite the political headwinds in some sectors, China is still on track for decent GDP growth over the next decade,” she said, highlighting the increased purchasing power of the country. middle class.
Some companies have also touted the value of other Chinese assets.
Paolini pointed out that the yuan has performed better than other major currencies this year, rising 1% against the US dollar. Chinese government bonds also outperformed, posting a return of 3.5% versus a loss of 1.1% on the JP Morgan Global Government Bond Index, a benchmark index followed by bond investors.
“Clearly, China remains fully ‘investable’ for foreign investors,” he added.
Caution remains in order
Goldman analysts have said, however, that any investing should be tactical.
Media, consumer services, education, retail, transportation and biotechnology could be exposed to further regulatory backlash, they added, as Beijing focuses on resolving what it is. considers social or cultural problems caused by these industries.
“It is difficult to predict the future direction of policy changes, but avoiding stocks and sectors where valuations are rich and … expectations [are high] can help alleviate this uncertainty, ”said Catherine Yeung, chief investment officer at Fidelity International. She added that investors have ditched internet and education stocks, instead investing in sportswear and renewable energy, among other industries.
“There have always been social and economic imbalances, and the pandemic has brought them to light even more”, she added. “China’s recent policy / regulatory changes are being put in place to address these imbalances with an emphasis on security, self-reliance and fairness.”
– Kristie Lu Stout and Jadyn Sham contributed to this article.