SYDNEY/HONG KONG: China may be an odd choice for investors seeking shelter from a Sino-US trade war. Yet, money managers in Asia are pouring funds into Chinese stocks as the long-term promise of a growing middle class trumps more immediate fears about tariffs.
It is also a vote of confidence in Beijing’s aggressive policy response to a festering Sino-US trade standoff which has hurt its economy, unsettled world financial markets and triggered fears of a global recession.
The anxiety has forced investors into defensive holdings such as the safe haven yen, gold and US Treasuries.
Paradoxically, for China, the rising US import barriers have an upside as they inject impetus to the shift in its economy from an investment-driven growth model towards one led by consumption and services. And, the nation’s 400 million-plus growing middle class provides a major attraction for fund managers.
“Owning domestic-focused names in China has been successful in 2019, even with all the noise around trade tension, weakening macro and the magic ‘7’ level for the renminbi,” said Sat Duhra, a portfolio manager for Janus Henderson Investors’ Asia ex-Japan Equities strategy.
“Names in the sportswear and beverage sectors have performed well as trade issues have not impacted them and their strong branding and high margins have attracted investors looking for less cyclical and global trade exposure,” Duhra said.
Domestic consumption already drives just over 75 per cent of China’s annual economic output.
In an effort to revive its $14 trillion economy, China has pumped cash into banks, fast-tracked infrastructure spending and rolled out tax cuts worth trillions of yuan to support consumers and businesses. And, it has said it could do more. Local governments have chipped in. Guangdong Province last month rolled out 29 measures to boost consumption, including relaxing restrictions on auto purchases.
Consumer shares have been relatively unscathed, even as escalating trade tensions wiped out 11 per cent of the main Shanghai stock market since mid-April, though the market is still up 17 per cent year-to-date.
The Chinese consumer staples index has jumped almost 50 per cent so far this year whereas its information technology companies index has climbed over 24 per cent, tracking the rise in the benchmark CSI300 Index.
CSI300 has risen 22 per cent in the same period, outpacing the 6 per cent gains in the MSCI Asia ex-Japan index and the 15 per cent rally in the S&P 500 Hot-pot condiment maker Yihai International, for instance, is already up more than 100 per cent this year after sky-rocketing 155 per cent in 2018. Shanghai-listed Tsingtao Brewery has risen over 30 per cent and Foshan Haitan Flavouring and Food Co has surged 51 per cent.
“We don’t think the trade war will have much impact on the Chinese consumption space,” said Robert Mann, a Singapore-based portfolio manager at Nikko Asset Management, who sees opportunities in China’s service sector.
“More of what China is doing is helping consumption. So, that’s one place to hide.” — Reuters
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