Since July 2022 the allocation to mainland Chinese equities in our Asian Equity Income strategy has been zero. As active, unconstrained investors that is the sort of big call we’re able to make if we feel it’s in the long-term interests of the clients who invest in our strategy.
We took this step for a number of reasons. We prefer to invest in democracies, countries that have freedom of the press and an independent judiciary so that if the government tries to change rules arbitrarily, companies and shareholders can appeal to the courts. Frankly, we don’t feel China meets that standard, and with the additional concentration of power in the hands of President Xi the situation is trending worse rather than better. The government moving to take ‘golden shares’ in Tencent and Alibaba effectively makes them state-owned enterprises and it’s possible US investors will not be allowed to invest in such companies in the future. That doesn’t feel like a great outcome for international investors in those stocks, and it’s not the sort of risk we want investors in our strategy exposed to if we can help it.
Plenty of opportunities elsewhere
Demographically, China also raises some big question marks for us. China’s population shrank in 2022 and India is on course to become the world’s most populous country this year. It is worth remembering China’s working age population actually peaked in 2014, but what is more important is what happens going forward. The UN expects China’s population to almost halve by the end of this century. This is a pretty sizeable structural headwind to growth, and we feel it’s something we don’t need to deal with, such are the wealth of opportunities we can find elsewhere in the Asia Pacific region.
One example is Australia, which is currently the largest country weighting in the strategy. Crucially, it meets all the democratic, governance and rule of law standards we highlighted above, and on top of that events in 2022 showed its defensive qualities, which we believe are all the more valuable given the obviously troubled state of the global economy. Australia is also a powerhouse exporter, and the value of its LNG exports surged 86% last year to almost $93bn, keeping Australia almost on par with the US and Qatar in terms of global exporters.
Fear of missing out?
Returning to the topic of China, the curtailment of its ‘zero Covid’ strategy late last year has sparked many headlines about the ‘China reopening’ trade and the supposed market rally that resulted. Yet the Chinese equity market outperformed the regional Asia Pacific ex Japan index only in the first four trading days of the year. For the remainder of January, China actually underperformed the region slightly despite ditching ‘zero Covid’, border reopening, relaxation of the ‘three red lines’ policy for the property sector (allowing more developer borrowing) and a more normal Chinese New Year holiday season. Consumption levels over Chinese New Year picked up considerably year on year, but were mostly still below 2019 levels, while property sales remained weak. On top of that, the recent controversy over the high altitude balloons over the US and Latin America is symbolic to us of the growing geopolitical risks around investing in China.
In conclusion, the lifting of Covid restrictions provides, at best, only short-term relief while China has many more deep-rooted problems and is increasingly viewed with suspicion by its trading partners. We therefore remain comfortable with our strategy’s zero weighting to mainland Chinese equities.
The value of active minds: independent thinking