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HomeMarketBetting Big on China: 13 Funds That Could Pay Off

Betting Big on China: 13 Funds That Could Pay Off

After a battering, Chinese stocks are showing some signs of a recovery.

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Hector Retamal/AFP via Getty Images

China is taking additional steps to stabilize its economy after rarely seen widespread protests in major cities and colleges campuses erupted as frustration over harsh Covid restrictions boiled over.

Chinese officials are tweaking their approach to the policy of zero-tolerance for Covid, with a National Health Commission spokesman this week saying it would ease restrictions faster based on each area’s particular conditions, and roll out efforts to bolster vaccination rates, especially among the elderly.

The moves come as the policy has become not just politically but also economically untenable. In a note to clients, Capital Economics’ Mark Williams writes that sticking with zero-Covid would mean lockdowns where cases are rising and restricting activity in parts of the country that represent two-thirds of China’s GDP—and is home to key production hubs for many global companies.

Shares in Chinese stocks rallied after the latest indications authorities would move toward a “living with Covid” policy that could set Chinese stocks up for at least a near-term rebound. 

Yet many funds have lightened up on Chinese stocks amid concerns about China’s longer-term economic growth prospects. Others have stuck with or are building heftier positions in Chinese stocks, especially as cheap valuations make them primed for a bounce on any inkling of good news.

Fund / Ticker AUM (mil) % of allocation in China Expense Ratio
EMQQ Emerging Markets Internet & Ecommerce ETF / EMQQ $417 54.27% 0.86%
Acadian Emerging Markets Investor / AEMGX 593 37.54 1.33
Principal Origin Emerging Markets / POEYX 2,049 36.32 1.55
Fidelity Advisor® Focused Emerging Markets / FAMKX 1,717 35.50 1.32
Empower Emerging Markets Equity / MXEOX 623.20 34.91 1.23
Invesco FTSE RAFI Emerging Markets ETF / PXH 1,223.60 34.26 0.49
Goldman Sachs Emerging Markets Equity Insights / GERAX 1,534 33.66 1.46
GMO Emerging Markets II / GMEMX 1,128 33.51 0.93
Mirae Asset Emerging Markets Great Consumer / MECGX 490 33.44 1.40
BNY Mellon Emerging Markets / MIEGX 442 32.87 1.64
iShares MSCI Emerging Markets Multifactor ETF / EMGF 710 32.84 0.45
MFS Emerging Markets Equity / MEMAX 5,376 32.82 1.31
Thornburg Developing World / THDAX 877 32.73 1.43

Data as of Oct. 31

Source: Morningstar Direct

Before the protests, Beijing’s new Covid measures outlined in early November and reversal of some of the onerous policies throttling the country’s battered residential property market offered enough good news to turn some cautious strategists bullish on hopes these moves would revive consumer confidence.

Chinese family bank balance are up 42% since the beginning of 2020, offering the tinder for a consumer recovery and one that could play out in the domestic A-shares market, according to a note from Matthews Asia’s Andy Rothman.

But risks abound. Easing Covid restrictions as infections are on the rise brings the threat of a public-health crisis that could force a national lockdown a la Wuhan in 2020 and deal a harsh blow to any recovery, not to mention consumer, corporate and investor confidence.

A transition out of zero-Covid is likely to be messy, but markets tend to look ahead. “The zero-Covid-19 policy is clearly going toward relaxation, with China dealing with the virus in a much different manner in six months’ time,” says Marko Papic, chief strategist at the Clocktower Group in a client note.

“The market moves on where policy is going, the marginal changes and the second derivatives, not on what the objective reality is today. As such, the situation on the ground concerns us far less than the announced policy shifts and rhetorical and narrative changes.”

The Politburo meeting in December could bring more clarity on fine-tuning restrictions and increased efforts to boost vaccination and stabilize the economy. Among the metrics analysts are looking for is an increase in daily vaccination rates to two million and the approval of new drugs.

Another possible catalyst could come in the next couple of weeks as investors are waiting for the U.S. audit watchdog, the Public Company Accounting Oversight Board, to determine whether its inspectors got enough access to audit records from Chinese companies so that they could avoid delisting from U.S. exchanges.

Barron’s screened diversified emerging market funds with more than $250 million in assets and at least a three-year record to find those that have an outsize allocation to Chinese equities versus peers—a position that has hurt in recent years—and turned up 13 with at least a third of assets in China and still open to new investors.

EMQQ The Emerging Markets internet & E-Commerce
exchange-traded fund (EMQQ) had the largest allocation, with more than half the portfolio in Chinese stocks. It’s had a rough spell over the past three years, losing an average annual 5% with weightings in hard-hit Chinese internet stocks like
Pinduoduo
(PDD),
Alibaba Group Holding
(BABA) and
Tencent Holdings
(700.Hong Kong). The past year has been even harder, with a 44% decline.  But if a detente between U.S. and Chinese regulators holds and avoids a mass delisting of Chinese companies, many of its holdings could benefit.

The $1.7 billion
Fidelity Advisor Focused Emerging Markets
fund (FAMKX) has eked out an average annual gain of 1.6%, beating 81% of its peers over the past three years, according to Morningstar. Top holdings include internet stalwarts like Tencent,
JD.com
(JD) and
Meituan
 (3690.Hong Kong) but also companies that should do well as consumer spending bounces back, including
Haier Smart Home
(600690.China) and
China Resources Beer
(291.Hong Kong).

The cheapest of the bunch is the $1.3 billion Invesco
FTSE RAFI Emerging Markets
ETF (PXH), which charges an expense ratio of 0.49%. Half of its top 10 holdings are Chinese, such as Alibaba, and Chinese banks including
China Construction Bank
(939.Hong Kong) and
Industrial and Commercial Bank of China
(601398.China). The structure of the ETF, which weights companies by an array of fundamental factors, blunted some of the recent pain, with performance down 2.5% on average annually in the past three years, and down 18% over the past year.

The largest of the bunch is the $6.2 billion
MFS Emerging Markets Equity
fund (MEMAX), which has a hefty stake in consumer-oriented Chinese companies—including Alibaba,
Yum China
(YUMC),
Kweichow Moutai
(600519.China) and
China Resources Beer.

Write to Reshma Kapadia at reshma.kapadia@barrons.com

Credit: marketwatch.com

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