China’s clampdown on monopolistic market behaviours has not only clipped the wings of technology giants but also evaporated stock gains collected by mutual fund investors. This has given an extra push in rotation into safer value stocks.
The government last week fined entities related to a dozen of technology groups including Tencent Holdings, Baidu and Alibaba Group Holding for disclosure failures, soon after wrapping up the “two sessions” proceedings where it promised a mix of regulatory scrutiny and market-friendly reforms. Ant Group’s top executive is the biggest casualty so far.
China’s 20 trillion yuan (US$3.07 trillion) mutual fund industry is among the casualties in the current chill. The median returns of mutual fund products have fallen to zero from a high of 10.7 per cent in mid-February, according to Citic Securities. Their top 100 holdings have swung to a 1.6 per cent loss from an 18.3 per cent gain, it added.
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“The bets on the technology giants may still face pressure in the short term,” said Gao Jingdong, an analyst at Shanxi Securities International. “China’s move to get tougher on the monopolistic practices and sprawling capital expansion, coupled with the lofty valuations of the tech stocks, will continue to drag down share prices.”
The CSI 300 Index has tumbled 11.4 per cent since reaching an all-time high on February 10, with 2020’s favourites like distiller Kweichow Moutai and battery maker Contemporary Amperex Technology sliding hard. Among small-cap tech stocks in Shenzhen, the ChiNext Index has slumped 19.2 per cent.
As markets reeled under tightening regulations, policy normalisation risks and asset-bubble warnings, a rotation out of troublesome tech and consumption staples into defensive old-economy stocks will gain further traction, according to some top money managers.
“Some sectors that outperformed over the past few years will face tough challenges, with the pandemic coming under control and the prospect of policy normalisation,” said Lu Bin, a money manager at HSBC Jintrust Fund Management in Shanghai. This year, “the reward will come from sticking with the fundamentals.”
Lu’s 3.1 billion yuan HSBC Low Carbon Fund gained 134 per cent last year, trouncing 955 other domestic stock-focused mutual funds tracked by Morningstar.
That view is echoed by Dong Chengfei at Aegon-Industrial Fund, who correctly called the 2007 stock slump. His 35 billion yuan Aegon-Industrial Trend Mixed Securities Investment Fund, one of two under his management, has gained 4.3 per cent this year. He trimmed equity exposure by 20 percentage points in the fourth quarter in one of his funds, while loading up on old-economy names like gold producer Zijin Mining and developer China Vanke.
Buying into value and dividend-rich stocks has proved to be the most successful strategy now. Such members in the CSI 300 Index have returned at least 13 per cent so far this year. Investing in momentum stocks has generated a loss of 9 per cent in the period.
Value, small‑cap and emerging markets equities could benefit from increasing inflationary pressure, Tim Murray, US-based capital markets strategist at T. Rowe Price, said in a report to clients last week. “Real assets” which include natural resources and real estate equities are “good alternatives,” he added.
To be sure, some analysts are optimistic that these popular bets like baijiu distiller Kweichow Moutai and electric-vehicle battery maker Contemporary Amperex Technology will regain favour. Resilient industry outlook and technicals are among key positives.
The current phase of consolidation may conclude when the so-called core growth companies have tested their respective 100-day or 200-day moving averages, according to Wendy Liu, head of China strategy at UBS Group.
The CSI 300 Index last week dipped below its 100-day moving average, though the index remained above the 200-day line, according to Bloomberg data. The last time the gauge fell below both lines in the 2015 crash, the market slumped by another 22 per cent within a week.
While volatility remains elevated, “strong earnings growth should compensate for the valuation compression resulting from the rise in interest rates,” said César Pérez Ruiz, chief investment officer at Pictet Wealth Management. “Rising rates will hurt long-duration assets like long-maturity bonds and growth-style equities and support companies with elevated cash flows.”
Losses in China’s “crowded trades” like liquor and tech stocks this year are not surprising. They have been foretold in past episodes of buying binge over the past two decades.
From 2005 to 2007, traders flocked to banking and property stocks to ride on yuan’s appreciation and the upward economic cycle, propelling the Shanghai Composite Index sixfold. The index slumped 70 per cent within a year when the bubble burst.
From 2008 to 2010, investors scooped up small- and mid-sized companies on bets China’s drive to transform the economy to a more consumption- and technology-based ones would benefit the fledgling industry players. A threefold jump in these stocks soon halved from peak in the ensuing year.
The current turnover and wild swings will continue, judging by the flow of money. Foreign investors have sold a combined 1.7 billion yuan of onshore stocks through Stock Connect over the past three weeks.
“The most dangerous time for the market is the transition from bull to bear,” Aegon-Industrial’s Dong said in an internal memo that leaked into local social media last month. Returns would be few and far in between without significant declines in stock prices, Dong added.
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