The arrival of the Omicron variant in China caused its economy to slow during most of 2022.
Driven by a quick rebound in economic activity and an expected sustained growth momentum in upcoming months, China-focussed funds in India have gained up to 40 percent in the past three months.
However, this has come against the backdrop of a 30-40 percent yearly fall in these funds’ net asset value (NAV) from January 2022 till the end of October.
There are four funds in India specifically focusing on China. These are Axis Greater China Equity Fund of Fund, Edelweiss Greater China Equity Offshore, Mirae Asset Hang Seng TECH Exchange-Traded Fund (ETF) and Nippon India ETF Hang Seng BeES.
The recent turnaround has been dramatic. On a one-year basis, Mirae Asset Hang Seng TECH ETF has been the worst performer with a fall of 16 percent, till January 20, 2023. But it has been the best performer on the last three-month basis (up 44 percent), as per data available with Value Research.
Edelweiss Greater China Equity Offshore, which is the biggest China-focused fund (assets of Rs 1,730 crore), has delivered 32 percent return over the last three months.
Here’s what investors need to know before investing in such funds.
Reasons behind underperformance
Headwinds such as the property downturn, Covid-19 flare-ups and restrictions, and deceleration of export growth due to the negative impact of the global slowdown have affected the Chinese economy significantly and, in turn, markets.
The arrival of the Omicron variant in China caused its economy to slow during most of 2022. Further, stringent regulatory steps taken by the Chinese government pertaining to new-age businesses forced investors to stay on the sidelines despite discounted valuations.
As per a recent report by Mirae Asset Investment Managers (India), aside from the domestic risks, China's economy is expected to be pressured externally by the Ukraine crisis and a global slowdown due to interest rate hikes to curb red-hot inflation.
The Chinese economy decelerated through the last quarter of 2022, being disrupted by the country’s zero-Covid policy in October and November, and then slowed acutely in December amid the sharp pick up in cases.
As per Edelweiss Mutual Fund, after the full relaxation of pandemic control measures in China, Covid-19 infections might have peaked in major cities from late December.
“While economic activities are rebounding quickly as the infection peak has passed, sustained growth momentum is expected in the upcoming months, which should support investor sentiment and market performance,” the fund house said in a recent note.
Since late November, China has dramatically shifted from its stringent zero-Covid policy toward full-scale reopening. The rapid removal of mobility control has caused the spread of the Omicron strain across the country.
A month and a half into reopening, most provinces and cities have now passed the first wave of infections, and economic activity is recovering, going by high-frequency transportation data.
Experts feel that after a major drop in the Chinese stock market over the past one year, valuations are in the comfort zone.
“If an investor is optimistic about the country, they can go for these funds. However, China is not out of the woods yet,” said Srikanth Bhagavat, managing director, Hexagon Capital Advisors.
He suggests that any exposure to China must be part of the overall global exposure of not more than 15 percent.
Investors should note that there are multiple risks associated with investing in China-political risk, geopolitical risk, economic health and pandemic-related risk.
“How any of them will pan out is anyone's guess. If one is confident of economic recovery, that covid-19 will soon be behind them and that the government will not to do anything to jeopardize growth unlike the last two years, it is an optimistic view and an investor can be satisfied with the exposure global funds have to China or go overweight on it. Going overweight has its consequences on the downside and upside. So an investor has to be conscious of risk appetite when making allocations,” he said.
Further, investors in emerging market ETFs or global funds should note that such funds already allocate 14-15 percent to China markets.
Deepak Chhabria, chief executive officer, Axiom Financial Services, said, “It's a high-risk investment in a particular geography, considering the prevailing situation in China and Taiwan. A broad diversified fund such as S&P 500 and NASDAQ would be a better fit. In country/geography specific funds or theme-specific funds, you need to time your entry and exit correctly, otherwise, returns can be normal.”
