Investors inspired by the Chinese New Year and looking to allocate to the region should avoiding doing so via dedicated China funds because the market is facing too many uncertainty and risks, according to Brewin Dolphin’s Richard Morley.
China celebrated the start of a new lunar New Year yesterday, the Year of the Tiger, but experts said it will not be a clean slate, with equities struggling to shake off last year’s baggage.
Chinese listed stocks took a beating after regulations imposed on its technology, healthcare and property sectors caused a significant market sell-off, which it is yet to fully recover from. This was on top of growing macroeconomic tensions with the US and other countries over human rights violations, which the Chinese government strongly denies.
These headwinds are not going away anytime soon and Morley, the senior investment manager at wealth manager Brewin Dolphin, said the main questions facing Chinese equity investors will still be around policy. This encompasses big tech regulation, the real estate market, changing monetary policy to try to hold up China’s deflating economic growth and the nation’s ‘Zero Covid’ approach.
On the latter, Morley said that there were “pros and cons” but “the bad news is that China is now facing its biggest Covid wave since spring 2020, and it doesn't look like it will be abandoning its ‘Zero Covid’ policy anytime soon”. He noted that this will likely extend the slowdown on economic growth caused by the pandemic.
The Chinese authorities have put supporting growth higher up the agenda this year, according to Morley, which is good news but not enough to make him bullish on the region.
He said at present, Brewin Dolphin “does not invest solely in China”, preferring to take their China exposure via general, Asia Pacific ex-Japan funds.
Morley explained that China’s economy was so broad and such an intrinsic part of the Asia Pacific region it was an unavoidable territory, “but with the structural challenges of taking direct Chinese investment and the uncertainty surrounding the political regime, we are underweight China relative to the region as a whole”.
He recommended that investors of all risk categories considering any exposure to Chinese equities should take the same approach, and diversify the macro risks facing China by taking an indirect allocation.
“Our asset allocation to the Asia Pacific (ex-Japan) region for a cautious investor would be 3.6%, a balanced investor might be at 6.2% and 7.8% for someone that wants to take higher risk,” he said.
For any investor wanting exposure to the region, Morley highlighted two funds Brewin Dolphin have invested in long-term and have a relatively low Chinese exposure: Stewart Investors Asia Pacific Leaders Sustainability and BNY Mellon Asia Income.
The former is run by FE fundinfo Alpha Manager David Gait, who Morley said prioritises high-quality companies in growing industries which are run by “exceptional management teams”.
“It’s quite a concentrated portfolio but it is underweight China at the moment given the geopolitical risk, which chimes with our central view,” he said.
The £7bn fund has just 7.7% of its portfolio invested in China, a massive underweight compared to the MSCI AC Asia Pacific ex Japan Net Index, which has a 31.5% allocation to the country. The fund’s biggest regional allocation is India, making up almost half the entire asset allocation.
Since it launched in late 2003 the Stewart Investors Asia Pacific Leaders Sustainability fund has made a total return of 897.8%, beating the benchmark index (503.2%).
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
BNY Mellon Asia Income was Morley’s second option, one he said: “Should be better protected from some of the uncertainties and should benefit from the reinstatement of dividends from companies in their portfolio while also investing in businesses benefitting from an increase in working from home in the region.”
The fund has 5.1% portfolio allocation to China, the second-lowest geographic allocation in the fund, ahead of Indonesia at 5%.
As income investors managers Zoe Kan, Ilga Haubelt and Nick Pope focus on yield and have a strict yield discipline, with no ‘zero yielders’ allowed in the fund. The team takes a thematic investment approach, taking a top-down view to find companies benefitting from tailwinds and can avoid forthcoming structural headwinds.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
This approach has enabled the fund to outperform both its sector and benchmark over 10 years, returning 382.9%.
| Fund | Sector | Fund Size(m) | Fund Manager | Yield | OCF | Launch Date |
| BNY Mellon Asian Income | IA Asia Pacific Excluding Japan | £978.30 | Zoe Kan, Ilga Haubelt, Nick Pope | 3.20% | 0.84% | 30/08/2012 |
| Stewart Investors Asia Pacific Leaders Sustainability | IA Specialist | £7,186 | David Gait, Sashi Reddy | 0.28% | 0.84% | 01/12/2003 |