A defining feature of September markets (next to uranium) is that the China investment narrative is facing some wobbles.
A quick recap:
• Tech giants Tencent (down >30%) and Alibaba (down ~50%) have slumped, amid regulatory crackdowns on gaming and a pending breakup of the Alipay fintech lending platform;
• Major listed property developer Evergrande just took the unusual step of suspending trade in its onshore bonds and is struggling to pay ~US$300bn in debt;
• Hong Kong-listed gaming stocks have slumped over 30% this week, in connection with a separate crackdown on the Macau gaming precinct; and
• Iron ore prices are still falling as Beijing looks to be following through on its commitment to cap steel production in the second half of the year.
That’s a fair bit to take in, but here’s macro investment manager James Whelan’s snapshot assessment:
“Show me someone who’s made money writing off China over the last 15 years, and I’ll buy you a (boutique) beer.”
In other words, yes – some fairly wholesale policy changes are taking place in high-growth Chinese sectors.
But as a portfolio manager at VFS Group, Whelan’s job is to assist the lay of the land and invest accordingly.
Underpinning that idea is the view that China will still be the strong economic growth engine investors have become accustomed to for “a long time to come”, Whelan said.
In that context, “there are areas of China that we don’t think make investable ideas at this time. And there are other areas where we do”.
iShares MSCI China A ETF (ticker:CNYA)
From a policy standpoint, many of the crackdowns in China are tied to a shift in the power balance away from giant privately-owned companies, Whelan said.
Concurrently, Chinese leader Xi Jinping has focused his rhetoric on common prosperity and state-backed support for China’s huge middle class.
Whelan noted that around 40% of the listed companies in China would be classed directly or indirectly as state-owned enterprises (SOEs).
Digging below the cataclysmic headlines around tech, property and gaming, does that present an opportunity?
“It’s in the headline, so I don’t want to give it away…”, Whelan says (hint: invest in SOEs).
Citing recent research from CLSA, the idea is that “those companies won’t be attacked with the same vigour as companies like Alibaba and Tencent,” he said.
And a simple way for retail investors to play the SOE trade is through the iShares MSCI China A ETF (ticker:CNYA).
“If you look at the chart on this thing, it really doesn’t seem to have been affected by any of these other selloffs,” Whelan said.
“It’s run by a pretty good shop in Blackrock, they’re one of the biggest ETF platforms in the world and they know what they’re doing.”
“It gives access to a section of China’s market that’s usually inaccessible and there’s a lot of stocks on there that also link directly or indirectly to the SOE list.”
The CNYA doesn’t trade on the ASX which is “a bit annoying”, but it’s available through the London Stock Exchange and US markets as well, Whelan said.
“If it’s worth buying, it’s worth buying on a good market. All of my accounts can access it and we’ll probably have a look at getting into that on dips.”
KraneShares CSI China Internet ETF (ticker: KWEB)
Another well-known fact in China is that its internet policies are tightly controlled, with little-to-no access for the online behemoths of the West.
Again – it’s a case of assessing the lay of the land and investing accordingly.
“The other investible theme we want to look at is that there are two internets now,” Whelan said.
“I think we’ll continue to see a separation of between Western and Eastern internets, with controlled usage in China. But people will still need to buy goods and services, they’ll just do it under their own network.”
How should investor respond? “You have to invest in both,” Whelan says.
For simple exposure to that thematic, he recommended the KraneShares CSI China Internet ETF (ticker: KWEB).
“The way I look at it is if you’ve got ETF exposure to companies like Google, Apple, Amazon and Facebook, you should have this one as well because it’s the Chinese version.”
“It’s still the second largest economy in the world. There are two internets and you have to invest in both. This is the way we’ve played the entire China thing the whole way,” Whelan said.
The big picture
For Whelan, investing in China is based on one’s view about cultural differences and the functioning of Chinese society.
“I was debating this with Alex Turnbull on our BIP show segment on Twitter Spaces the other week, and I basically to him that with the current state of China’s mentality with regard to common prosperity — it’ll be a ‘miracle’ if it fails,” Whelan says.
“When you look at a situation like Evergrande, ultimately I think it’d be strange if it wasn’t bailed out in some capacity.”
“I think it’s too big to fail. So we want to continue to accumulate good companies that provision services and goods to middle class of China,” Whelan said.
“Companies that have paid their dues and understand their place in the chain will make good investments over the next 12-24 months, which is what the time frame for investing in China should be.”
And as for steel cuts, iron ore prices and industrial production, Whelan said the key narrative centres around the 2022 Winter Olympics – scheduled for February in Beijing.
“Everything to do with industrial production is because of the Olympics, and that’s that,” Whelan said.
“Broadly speaking, we see any dip in China to be bought — especially when it comes to industrial production.”