Having been underweight China for some time, the Jupiter Asian Income Fund now holds no mainland China positions.
In July, I exited our last remaining mainland China stocks, as well as one Macau-based business. Prior to this, the Jupiter Asian Income Fund had already been underweight China for some time, due to my low expectations of corporate profitability relative to the rest of the region and a belief that valuations in China deserved to be de-rated, given a long period of regulatory clampdowns and travel restrictions. More recently, I have become increasingly uncomfortable with the direction of domestic politics in China, as well as the souring of relations with other countries, in particular the US, and I continue to take a negative stance on the outlook for China’s economy.
Additional investment restrictions to come?
There have been increasing warnings about the threat that China poses to the West from US and UK intelligence services; the upcoming November congressional elections in the US are likely to act as a catalyst for more anti-China policies. Already there exists a list of stocks in which US investors cannot invest, and for which US banks cannot facilitate trading. This list includes most of the telecom firms in China as well as a number of technology companies. Post November, we believe there is a fair chance that the number of companies on this list will grow.
Heavy interference will impact the economy
There have been widespread reports of mortgage holders boycotting payments due on unfinished homes and the property sector is weighed down by very heavy debts. Indeed, a number of developers have already defaulted on loans. In order to ease the situation, there has been some heavy-handed government-directed bank lending – this is something we do not expect to see in well-functioning economies. The continued zero-tolerance Covid restrictions are straining the economy further, and GDP growth is likely to be low this year and next. It is even possible that a deflationary period could begin in the year ahead if China’s banks recognise a higher proportion of the bad loans on their books.
On top of these concerns, I believe China has been insensitive in its sabre-rattling directed towards Taiwan. I would expect that any military attack against Taiwan would likely send the economy into a downward spiral. Foreign direct investment, as well as portfolio investments, would likely seize up and, if possible, go into reverse. The way in which Russia has been ostracised could be seen as a template for what could happen if we were to see a military attack in Taiwan.
Taking indirect exposure through other countries
The Jupiter Asian Income Fund does still have some exposure to China’s economy, but our preference is to keep this exposure indirect via businesses in neighbouring countries that successfully sell goods or services to China. There are many companies across Australia, India, Singapore, South Korea and Taiwan that we remain happy to invest in.
In light of our exit from China, we have no intention to change the benchmark of the fund. China remains part of the investment universe in the Asia Pacific region, and many of the funds in our peer group continue to invest there. This decision to take our mainland China allocation to zero may not be a permanent stance – but it will be our stance for some time to come.
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The fund invests a significant portion of the portfolio in emerging markets, which carry increased liquidity and volatility risks. This fund invests mainly in shares and it is likely to experience fluctuations in price which are larger than funds that invest only in bonds and/or cash. Quarterly income payments will fluctuate. All of the fund’s expenses are charged to capital, which can reduce the potential for capital growth. The Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request.
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