From BlackRock to JPMorgan, China stock funds bleed with mistimed optimism on tech rebound and regulations

·4-min read

It was supposed to be a turning point for stock investors betting on an end to a year of regulatory assaults on Chinese technology companies. Alas, that optimism has so far proved to be mistimed.

BlackRock, JPMorgan, Fidelity and E Fund Management posted a 14 per cent to 20 per cent decline in their flagship equity funds from July to September, according to Bloomberg data. They ranked among the worst performances since at least the end of 2018.

More than US$460 million of market value in tech stocks in Hong Kong has been erased in regulatory crackdowns since authorities foiled Ant Group’s stock offering this time last year. Analysts have trimmed their price targets for Alibaba Group Holding, Tencent Holdings and Meituan by 18 to 25 per cent over the past six months, with most still sticking to their buy calls.

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“Shares of some well-run listed companies have seen significant declines recently because of concerns about policy uncertainty and a slowdown in the economy and corporate profits,” Zhang Kun, a fund manager in Guangzhou at E Fund, said in his latest quarterly report to investors. “Valuations are basically reasonable and these companies are expected to deliver quite visible profit growth in the coming three to five years.”

The MSCI China Index, tracking mostly offshore Chinese stocks, slumped 18 per cent last quarter, while the Hang Seng Tech Index in Hong Kong lost 25 per cent. Money managers can now add China’s economic slowdown, a resurgence in Covid-19 cases and growing debt defaults among property developers to their lists of setbacks.

The latest fund reports underscore the challenge facing investors who have ploughed ever more money into the onshore stock and bond markets. The trail of profits and the lure of global index inclusion have kept investors upbeat and hopeful of a dose of policy stimulus to fix the current malaise.

Despite holding opposite views on the fading pace of regulatory crackdowns and policy responses, funds bled all the same. JPMorgan’s US$1.5 billion Pacific Technology Fund fell 14 per cent in value in the three months to September, its worst quarter since the end of 2018.

The US$1.5 billion BlackRock China Fund fell 15.6 per cent in its worst performance in six years, according to Bloomberg data, while the US$5.5 billion Fidelity China Consumer Fund lost 19.7 per cent for its biggest setback in more than a decade.

JPMorgan and BlackRock did not immediately reply to questions about their fund returns, while Fidelity declined to comment.

Andy Wong, who manages the US$202 million Strategic Income Fund at Pictet Asset Management, owned the likes of Tencent, Meituan and Alibaba, which owns this newspaper. His fund took a 3.9 per cent knock from July to September, ending a five-quarter winning run, according to Bloomberg data.

“With positive messaging from authorities, Chinese stocks got more attractive,” he said in a note on October 27. “We started adding to Chinese tech in early August. Risk-reward has improved, and we have further increased our positioning.”

At E Fund Management in Guangzhou, Zhang’s flagship Blue Chip Selected Mixed Fund, which focuses on China’s onshore stocks, has not been spared either. He said headline news and macroeconomic issues are simply “short-term noises” that obscure the improving outlook.

He oversees four funds whose combined assets top 100 billion yuan (US$15.6 billion), the most among onshore fund managers. The biggest holdings in his flagship fund include liquor distillers Luzhou Laojiao and Kweichow Moutai, as well as Tencent, according to its quarterly report.

China’s economic growth eased to 4.9 per cent last quarter from 7.9 per cent in the preceding three months as the manufacturing and property engines faltered. A series of offshore debt defaults by developers from Fantasia Holdings to Kaisa Group has added to the market misfortune.

The safety of fixed income was scant comfort as China Evergrande infected the Asian junk bond market. For example, Pimco’s Asian High Yield Bond Fund handed investors a 6.4 per cent loss in that quarter while Goldman Sachs’s similar fund fell 5.5 per cent.

“Overall, we believe that investors will have to deal with high volatility not only regarding macroeconomic figures but also in Chinese financial assets, in particular, equity and credit,” Amundi said in its October report. “This is necessary medicine in the short term which should support a stabilisation and reinforce the structural outlook for Chinese assets in the medium term.”

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