The Chinese sell-off, when will it ever end?

Dec 12, 2021

Experts believe the great China correction and sell-off may last longer, but it will start shifting focus to less regulatory-affected sectors.

The Chinese sell-off, when will it ever end?

China regulatory clampdowns have seen the China A-Shares and China All Shares Index fail to outperform in the third quarter of this year, according to a new Bfinance report. However, equity managers are sayiing that there is upside in sectors that have so far escaped the focus of China's market watchdogs.

The report said that the third quarter brought a very significant fall in China equity valuations, with the domestic A-shares market down 4% and the All Shares index—which captures a broader range of Chinese companies—down more than 13%.

Several companies and sectors that are usually highly dominant in the Chinese market have struggled, including internet/e-commerce firms (with regulatory action against Alibaba and Baidu), education (TAL Education and New Oriental Education) and gaming (Tencent, NetEase), according to the report (see table below).

RELATIVE PERFORMANCE OF ACTIVE MANAGERS VS RESPECTIVE MSCI BENCHMARKS, YTD AT SEPTEMBER 30 2021

Source: bfinance, eVestment

Kai Kong Chay, Manulife IM

“We believe the year-to-date correction led by the regulatory clampdown has allowed value to emerge on China equities from a fundamental standpoint. While it may still be too early to say, the current episode of regulatory tightening is over, we believe the most severe measures have now been released and digested,” according to Kai Kong Chay, managing director and senior portfolio manager for Greater China Equities at Manulife Investment Management.

Jessica Tea, senior investment specialist for Greater China equities at BNP Paribas Asset Management, believes “the good news is that the peak of regulatory intensity is likely behind us”.

“That being said, this does not mean that we will return to the past. We are entering a new era as the internet sector is getting more mature (naturally slower growth, slower margins expected),” Tea told AsianInvestor.

While there are names on the selling list, there are still buyers.

“We believe the recent market selloff was driven not just by the China-led crackdown, but also macro slowdowns. The crackdowns have led to headwinds in some specific sectors such as education, real estate, and gaming but other non-discretionary industries have seen some slowdown as well. We think the government has the tools to loosen real estate policies and improve liquidity if necessary,” Morningstar China internet team told AsianInvestor.

“We prefer taking a bottom-up look at internet names as opposed to top-down. Some stocks we are recommending buying at the moment are Tencent, NetEase, and JD,” Morningstar noted.

AVERAGE SECTOR EXPOSURES OF ACTIVE MANAGERS, CHINA A SHARES

Source: eVestment

REBALACING

Jessica Tea, BNPP AM

Some portfolio managers are also balancing their China exposure with more focus on less regulatory-affected sectors and names.

“Given lower global investor expectations, China internet names have tumbled and are now at an attractive valuation. It is key to remain selective and we continue to favour names with strong competitive advantages and solid businesses. We are constructive on local semiconductors, internet security systems, hardware technologies,” Tea added.

Her views were echoed by Chay.

“We increasingly see investor interest riding on the policy tailwinds of certain favourable sectors that are supported by government policies," Chay said.

"Manufacturing upgrade and semiconductor supply chain self-sufficiency are some examples that are on the top of the Chinese government’s agenda. We believe active management focusing on bottom-up stock election will be crucial to identifying emerging winners under the current environment for investing in China equity.”