All the drama has been in Asia this week. Japan has hogged the sporting headlines, while China has dominated the pink pages. It’s worth understanding what’s happening in Beijing, as it provides a timely reminder that markets aren’t one-way bets, and that risks come in all shapes and sizes.
The numbers first of all: The Chinese stock market is down almost 9% on the week, having been off by 14% at worst (there’s been something of a rebound over the last few days). This has exacerbated what was already a sticky run: having rallied by 18% into late February, the market then dropped by 31% to hit this week’s trough. Given the importance of China in wider Asian and emerging market indices, these too have had a very tough week, leaving them flat for the year.
Why has this happened? One word: politics. This has been brewing for a while now, but what was made very clear this week is that the Chinese Communist Party (CCP) is uncomfortable with how much control was being gained by the private sector at the expense of the state.
The specific action that sparked this week’s rout was a crackdown on private tutoring companies, wiping billions off several companies in the process. But before that the CCP had signalled a wider discomfort with private data gathering and security, with the very clear implication that data should be the property of the state, not of private companies.
There are lots of risks investors have to consider, so many that some become forgotten, overlooked or simply not learned in the first place. This event is a reminder of the twin risks of political and regulatory risk. Perhaps blinded by the incredible returns made by Chinese tech companies in recent years, some investors loaded up on these companies, and in doing so forgot that you only “own” something in China for as long as the state says you can. Which is another way of saying that, ultimately, you don’t own it, the state does.
It is also a reminder of the benefits of diversification: even our most aggressive portfolio has considerably less than 10% exposed to Asian ex-Japan equities, while our Cautious Portfolio has less than 4%. The rest is spread across different markets and asset classes, and so actually benefited from rising share prices in the UK and Europe this week, where we have higher weightings.
And, thankfully, much of our Asia ex-Japan exposure is through one of our trusted, actively-managed fund picks: Schroder ISF Asian Total Return. Its managers, Robin Parbrook and King Fuei Lee, read the Chinese mood music months ago, and heavily reduced their exposure to China. As a result, they have seen only a modest dip in their Fund’s price, while Asian indices, of which Chinese tech companies are a large part, were walloped. Given the complexities of this situation, and the sense that there’s more to come from the CCP, we’re glad these Asian equity specialists are looking after these parts of our portfolios. They’re highly conscious of risk in whatever form it comes.
Have a great weekend,
Simon Evan-Cook
(On Behalf of Raymond James Barbican)
With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.