Analysis-China investment consensus cracks as politics fuel fears By Reuters

By Tom Westbrook

SINGAPORE (Reuters) – A decades-old foreign bullish trend in China’s capital markets has been collapsing, investment flows and interviews with fund managers point to a new era of uncertainty fueled by geopolitical risk and US investors particularly wary.

There have been many excuses to buy into China as the world’s second largest economy gathers momentum.

Post-pandemic recoveries in exports, property and marketing have been more difficult than expected. Stock market returns are strong. Jack Ma reappears and plans to break it up Ali Baba (NYSE:) The NYSE empire was also seen as ending a few years of regulatory crackdowns.

But the big long-term foreign investors are missing out. Their absence, and the asset managers’ reasons for this, reveals a wariness in the investment community about how to price new risks for capital, as China becomes a superpower and a formidable competitor to the United States.

It is unlikely to be resolved quickly even if markets continue to rally and the Chinese economy maintains global growth.

“It’s about capital preservation, not really returns,” said Hayden Briscoe, head of multi-asset portfolio management for Asia Pacific at UBS Asset Management in Hong Kong.

“Foreign money right now, especially from the United States, is reluctant to invest,” Briscoe said. He himself is optimistic about China, but said many managers are turning heads after seeing war sanctions wipe out the value of Russian investments.

“(They) still view geopolitical risks and Russia’s recent experience may make them more hesitant than they normally are.”

The data paints an ambiguous picture, but it supports the brokers’ analysis that the offer from money managers who only hold long contracts is absent.

The flow figures show net foreign purchases of about 188 billion yuan ($27 billion) this year. That’s a lot, but most of that was congested in January when “fast money” hedge funds were having momentum as coronavirus rules eased and markets rebounded.

Allocation analysis from data firm EPFR shows a broad downward trend, especially for US-based China funds. The EPFR figures show that provisions for those hit a record low last October and have fallen year-on-year for four years.

HSBC research indicates that global funds are less heavy in China, and Bank of America (NYSE:) has noted the impact on market dynamics.

“Without long-term, ingrained investors, the H-stock market becomes more volatile, driven by the ins and outs of ‘fast money’,” said Winnie Wu, senior China equity analyst at Bank of America after surveying about 30 funds in Hong Kong.

Game changer

The investment mood reflects political uneasiness in the West over the rise of China. Competition with the United States, in particular, has intensified, from trade disputes to strategic rivalry that has prompted export and investment bans on the Chinese chip industry and other sectors seen as militarily important.

Multinational corporations are also remaking their supply chains to avoid such heavy reliance on Chinese manufacturing, investors say the trends are changing the country’s risk-reward calculation.

“From around 2000 until pre-COVID, this was all a one-way bet for China,” said Ashley Pittard, head of global equities at Bendall in Sydney.

“But the game has changed,” he said. “They were the manufacturing center of the world… (but) the pendulum has changed. It’s not as clean as before… It’s not as easy as just throwing money at big-cap Chinese stocks.”

Sentiment can certainly change quickly and plenty of investors remain willing to invest in China and are positive about the outlook – including, for example, the sell-side analysts at Morgan Stanley (NYSE:) and other major US banks.

EPFR figures show that allocations to China’s funds outside the US have increased for two years and recent performance of mainland markets has also been encouraging.

Since late October, when grumbling began about a shift in China’s COVID policy, the top-notch CSI 300 index has both risen more than 13% against a 6% gain for the United States over the same period.

“We came to this conclusion that the rally is probably half to a third of the way. We still think there is an opportunity for investors,” said Robert St. Clair, head of investment strategy at Fullerton Fund Management in Singapore.

“The key sign that the rally will continue, and that’s what we’re seeing, is when earnings expectations start to revise upward.”

However, the reluctance of others can be self-fulfilling, if lackluster flows hinder performance and fail to provide compelling reasons for foreigners to leave their home markets.

“We are bullish on China in the short term, but our long-term view is neutral to negative,” said John Pearce, chief investment officer of A$115 billion ($75 billion) Australian company UniSuper.

“Since it is impossible to quantify geopolitical risks, we do not attempt to do so,” he said. “Our reservations about the long-term prospects for Chinese investment are based on our view of returns on capital.”

($1 = 6.9024 renminbi or 1.4981 Australian dollars)