Defying trade war odds, some Chinese equity funds show how to rake it in

Yihai International Holding

04/06/2019 07:46

* Long-only Xingtai China fund thrives despite trade war 
    * China "safe haven" consumer stocks outperform markets
    * Exporters, other sectors hit by trade war shunned by
investors

    By Samuel Shen and John Ruwitch
    SHANGHAI, June 4 (Reuters) - As the Sino-U.S. trade war
roiled stock markets over the past year, China-focused fund
manager Michelle Leung sat unfazed on her holdings of hot pot
condiment maker Yihai International.
    It was a good call. And not simply because people need to
eat whether in good times or bad times.
    Yihai  1579.HK , whose shares have surged nearly 900 percent
over the past two years, are among a handful of high-conviction
stocks that helped Leung's long-only China equity fund shine.
    In 2018, when the broadening trade war knocked the MSCI
China Index  .MICN00000PHK  down roughly 20%, Leung's $200
million Xingtai China fund achieved an enviable positive return
of 4.9%. During the Jan-April period this year, her fund
delivered a return of 30.1%, according to the fund's latest
disclosure.
    "The trade war is a big issue today," said Leung, Hong
Kong-based CEO of Xingtai Capital, noting the timing of any
resolution to the dispute remains uncertain.  
    "No one has information edge on that. But we do have an
information edge on the companies we invested in."
    That Leung and a bunch of fundamentals-based, bottom-up
investors are thriving in China is evidence that the world's
second-biggest economy still offers plenty of opportunities for
stock pickers, despite the risks of a protracted standoff with
the United States.
    Qi Wang, CEO of China-focused asset manager MegaTrust
Investment (HK), said the company's strategy has been to
identify firms likely to achieve high growth "with or without
Trump and the trade war."
    "The macro environment today is already so complicated", so
the stock-picking strategy needs to be simple, he said.
    Based on intensive due diligence, MegaTrust picks stocks in
sectors such as consumer staples, pharmaceutical and finance,
while avoiding cyclical and export-oriented stocks.
    That strategy contributed to MegaTrust's relative
outperformance. Its $600 million China-focused funds lost 15
percent in 2018, in contrast to a 25 percent slump in the
benchmark CSI300 Index  .CSI300 . So far this year, MegaTrust
has delivered a return of 22 percent, based on latest
disclosures. 
    
    CONSUMPTION BET
    The consumer sector is also a focus for Xingtai Capital,
which invests in Chinese companies listed both at home and
overseas. 
    "The growth has to come from domestic consumption more in
the next couple of years," Leung said, adding China's shift away
from an export-led growth model will likely accelerate due to
higher U.S. tariffs and Beijing's tax cuts.
    Leung shuns consensus names such as e-commerce platform
Meituan Dianping  3690.HK  or Alibaba  BABA.BA , as well as
companies which rely on exports for growth. After the trade war
flared-up, she trimmed her exposure to a Chinese apparel firm
that manufactures goods for international brands.
    Leung bases her views on a microscopic research of her
portfolio of companies, leveraging her experience as a former
private equity investor. 
    "We have conviction in the stocks we hold … even in times
like this, when the market is very volatile," said Leung,
explaining she would "drill down" into vulnerable areas of a
company, talk frequently with the management and conduct channel
checks.  
    David Dai, general manager of private fund manager Shanghai
Wisdom Investment Co Ltd, agreed that the consumer sector is a
safe haven.
    Chinese consumer staples  .CSIASCSI  have risen over 10% in
the past year, compared with a 14% slump in Chinese IT companies
 .CSIINT  and a 4.6% drop in the benchmark CSI300 Index
 .CSI300 . 
    "The trade war has little impact on what you eat and drink,"
said Dai, who holds stocks including milk tea maker
Xiangpiaopiao Food Co  603711.SS  and casual braised food maker
Zhouheiya  1458.HK 
    "If you hold these stocks, you can sleep well at night." 

 (Editing by Vidya Ranganathan & Shri Navaratnam)
 ((samuel.shen@thomsonreuters.com;  +86 21 6104 1789; Reuters
Messaging: samuel.shen.thomsonreuters.com@reuters.net))