Zhao Yuanyuan, a hedge fund manager in Shenzhen Qianhai JianHong Times Asset Management Co, has recently made some big investments in infrastructure, energy producers and Covid-19 drug manufacturers. And it has been worth it: his fund has risen 138% this year, making it the best performing among more than 20.000 Chinese hedge funds. And now they have defined their next objective: investment in Chinese stocks.
Why is Zhao optimistic about investing in Chinese stocks?
China's key stock index has had a terrible year so far, down 20%, compared to even 16% for global stocks. But Zhao is probably betting that investor pessimism has peaked. And it's easy to see his point: lockdowns are easing in places like Shanghai and an estimated $5 trillion in economic support has already been announced this year.
Movements of the last year of the CSI 300. Source Bloomberg.
Last week, his fund began unwinding some of its losing investments in China. But he hasn't become completely optimistic just yet. New outbreaks of Covid-19 are causing us to be more cautious, while further easing of government restrictions could help restore interest in investing in Chinese stocks. But it's not just the lifting of lockdowns that fuels Zhao's optimism. Foreign investors have regained interest in investing in China stocks at their fastest pace all year. That could be because we're now at a point where the virus-hampered earnings recovery and stock market valuations are improving.
Investment in Chinese stocks since 2021. Source: Bloomberg
In which sectors does investment in Chinese stocks move?️
Zhao's fund benefited from being "net neutral" earlier in the year, and is set to benefit now from holding long-term stocks, with about 60% of its capital invested in ways that will benefit from the stock market's rise. . And Zhao is betting that the consumer discretionary sector in China, especially vehicle manufacturers and suppliers, could earn more during a potential rebound. He Global X MSCI China Consumer Discretionary ETF (CHIC) is a way to take advantage of the upside potential of consumer discretionary stocks, with investments in stocks of large and mid-sized companies in the MSCI China Index. And the Global X China Electric Vehicle and Battery ETF It could be a good way to make an investment in stocks with a push toward China's auto industry, which, like much of the world, is migrating to electric power.
Comparison of profitability between the two ETFs. Source: Yahoo Finance
So we invest in Chinese stocks?⚖️
In addition to Zhao's ideas, it is worth reiterating one of Clocktower Group at the end of last year, which is to make an investment in Chinese technology hardware stocks. The Chinese government largely left hardware makers alone, even as it cracked down on the country's software giants. There is strong global demand for semiconductors, green technology, materials and energy, and several Chinese companies are well placed to benefit from it. There are a few ETFs to choose from here: the KraneShares CICC China 5G and Semiconductor Index ETF (KFVG) offers exposure to Chinese hardware. If we want to give it a tone more green to these investments, we could invest in the KraneShares MSCI China Clean Technology Index ETF (KGRN).
Investing in semiconductors is particularly timely given the growing tensions between China and Taiwan, the latter being home to Taiwan Semiconductor Manufacturing Company (TSMC), one of the world's largest chipmakers. They control 90% of the global supply of advanced semiconductors. If those tensions escalate, buying semiconductors could prove to be a shrewd investment, even as buying from China in general could become even riskier.