Market Musings 12/07/20: Bull in a China shop

12th Jul '20 by Edmund Shing

13 comments 911 reads

The Oriental Express

While stocks had a bit of a less decisive week last week, one region stood out for a big surge: Mainland China.

in spite of the turmoil around the new security law being implemented by China in Hong Kong, Chinese stocks have been the standout region globally over the last two weeks.

Just look below at the performance of the Shanghai Composite index, which has benefited from the strong recovery in the Chinese economy post-COVID combined latterly with a resurgence of domestic retail investor interest in Chinese stocks.

Shanghai Composite on a tear

This is not just due to tech stocks like Alibaba (BABA) or Tencent (TCEHY), but also now stocks from more traditional industries such as Beverages.
Tsingtao Breweries, the famous brewer of that iconic Chinese beer sold in Chinese restaurants, is one example of this broadening interest:

Tsingtao Breweries bubbling up

UK investors can get exposure to Chinese stocks via funds, ETFs or investment trusts. Personally, I prefer investment trusts given their strong performance versus the Chinese equity indices over the long-term, including both Jpmorgan China Growth & Income (LON:JCGI) and Fidelity China Special Situations (LON:FCSS) :

JPMorgan China Growth & Income has beaten Fidelity Chinese Special Situations this year

An indirect way to gain exposure to China and its post-COVID recovery is via copper: 50% of the marginal demand for copper comes from China, and so is a big beneficiary of any growth recovery in the land of Mao Zedong.

The copper price (HG1! - the orange line below, in USD) has already recovered to above its pre-COVID crash levels, while copper producers like Antofagasta (LON:ANTO) have also seen a good rally in its share price:

Copper and Antofagasta recover in line with China

The obvious laggard in China is Hong Kong - notably the Hang Seng index of Hong Kong-based companies, including of course HSBC and a swathe of real estate companies and conglomerates.

Due to the ongoing turmoil in the Pearl of the Orient, the Hang Seng index continues to lag, as one might expect:

Hang Seng index is not keeping pace with the Mainland (Shanghai Comp. in orange)

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MiserableJacktPotato

12th Jul '20

Problems.

1. This reads like, and probably is, state sponsored propaganda.

2. The amount of fraud, IP theft and other corporate misdeeds are truly breathtaking. The Chinese governemnt has, for decades, refused to act. Luckin Coffee and GSX Techedu being a couple of recent examples. There are countless more.

3. None of the numbers, be they economic, public health, air quality, and anything else are in any way believable. They’re just fabrications to paint the CCP in a positive light.

3. China is likely to suffer severe backlash for their highly aggressive foreign policy. Democratic and free 1st world nations are, finally, starting to realise the threat and creating a joint response. Expect this trend to continue.

4. Could anyone look at themselves in the mirror and say that they has no issues investing in a country that; locked up over 1 million Uighurs, hid the truth of Covid 19, has militarised the South China Sea and ignored international judgements on the issue, is militarising Ladakh, has ripped up the agreement regarding Hong Kong.

China is desperate for foreign currency. Don’t give them yours.

The Phoenix

Love the weekend sector/asset round up's Edmund out of interest due you have any view on Coco bonds at the current time ?

My limited understanding is they are essentially a play on the banking sector and sit in the high yield space all be it possibly riskier as in times of market volatility prices can become nearer equity like rather than bond like.

Edinburgh Investor

Excellent write up as always Edmund, a quick scan of Fidelity China Special Situations (LON:FCSS) top 10 holdings gives a reasonable insight into what you’re getting. They do a good job filtering out the zeros and focusing on the growth that China offers.

pka

Edmund, I think your market musings are very interesting and useful. Please carry on providing them!

Last week, I noticed the recent improvement in performance of the two China investment trusts you mentioned, and thought about buying them. But I couldn't bring myself to do so, for similar reasons to those given by IGotPoesJacket.

Metatron

Agree there is a case for avoiding China on ethical grounds however the idea that Western govts will do so when there is a shopping list of developing countries supporting China including notably many Islamic ones is naïve.
And one can add the threat of China using cyber attacks on hostile nations to deter govts
In the long run the question is what will India and Russia do if they believe China threatens them.One could see an anti-China alliance between NATO and India & Russia

ambrosia

Has anyone else noticed we currently have a strong dollar and high gold price, the classic link seems to be broken, historically gold goes up dollar goes down and vise versa.

I'm hoping the dollar drops soon, a strong dollar will be bad for all those emerging markets trying to recover from covid

Did you not see the news over the weekend, 2 countries in the G20 refused to back the UN's criticism of China's human rights record, the first is obvious, the second was Saudi Arabia. Western Govts are already uniting against China, it has taken a long time for them to get started but they're starting to realise the threat. The developing countries are pretty much an irrelevance but we should do more to bring them into the Western rules based world, buy their goods and help with their cyber defence capability.

The $ is weak, interest rates are 0.25%.

It’s just everybody else is weaker. It’s all relative.

William K

13th Jul '20

Excellent as always Edmund. I am topping up on my Emerging Markets funds.

dfs12

14th Jul '20

Fantastic analysis Edmund. Thank you very much for taking your time each week to add these very measured, varied and interesting posts. Excellent stuff.

Edmund Shing

15th Jul '20

Yes ambrosia, there has been a lot of discussion about the potential for a lower US dollar, which effectively is happening via a higher gold price (if you think of gold as a non-paper currency). Lots of potenmtial for the euro and JPY to strengthen against the USD, there has been discussion of this eg in the recent macrovoices podcast, if you are interested. Edmund

Hi clarea, there are coco bond funds eg offered by Invesco in ETF format that have done very well. Clearly the high yields have been tempting for many investors, and they have done well with capital appreciation following as well. This Invwesco ETF holds RBS, Lloyds and Standard Chartered coico bonds, to name but a few.

The dividend yield offered is still high at over 5.5%, so an income investor would be tempted by that, but I think the bulk of cthe capital appreciation is over now, with the prices having almost returned to pre-COVID levels.

I think the potenital for capital loss is small, given the strong balance sheets that UK and European banks have these days, even with a likely rise in bad debts from corporate loans.

Berksbee

17th Aug '20

Hi Edmund, most useful thanks.

On getting exposure to the Chinese Market I thought it worth mentioning a route I have used. I have a USD trading account with Charles Schwab but there are plenty of others. Through them I've bought shares in a couple of Chinese gaming companies CYOU, DYOU, HUYA that have US ADRs. CYOU has now gone private. The reason I got into them was some of my US tech shares were looking scarily toppy and I saw an article by the Motely Fool talking about how cheap they were. DYO Research but DYOU and HUYA have Tencent as their largest stakeholder, significant cash holdings and ratios that look very reasonable.

Appreciate this is a bit off topic for most UK subscribers but hope its useful for some.

Market Musings 12/07/20: Bull in a China shop

The Oriental Express

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Edmund Shing

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