Not quite a quiet summer

Earlier this year, we advocated dedicated China equity allocations within portfolios given their potential to enhance prospective risk-adjusted returns. Since then, there have been a number of regulatory actions in areas of antitrust, data security and private education:

 

  • Ride-hailing company DiDi Global Inc. saw business activities severely curtailed after it went ahead with an overseas listing without full regulatory approval.
  • Education sector reforms that will force after-school tutoring companies to transform into non-profit entities, which could be seen as a confiscation of an entire sector by depriving investors of future profits they would have derived.
  • Tech giant Tencent faced antitrust actions against its music streaming business and was subsequently rocked further by a strongly worded article in the state media that suggested there was potential for regulatory action against its video gaming business.
  • Meituan, an e-commerce platform, faced antitrust action and was also impacted by the introduction of government guidelines to improve the wages and benefits of food delivery riders.

Our strategic recommendation on China is not undermined by recent events, even though they have further highlighted the importance of choosing an active mandate for this allocation. From a tactical standpoint, we note that the decline in equity markets has reduced valuations, presenting a cheaper entry point. However, we would not go all gung-ho yet to allow more time for the current regulatory dust to settle. Therefore, our tactical (one– to three-year) view on Chinese onshore and offshore equities is to be invested in line with the long-term strategic allocation explained above.

 

Download the paper to learn more about why the strategic case still sound.

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