Are Chinese stocks a good buy for Indian investors?
Premium- Global diversification is an important part of a well-rounded portfolio and Chinese stocks are cheap by historic standards
Mirae Asset Mutual Fund launched its Hang Seng TECH Exchange Traded Fund (ETF) in December 2021, at the height of the bull market globally and in tech stocks in particular. As the calendar flipped to 2022, the Russia-Ukraine conflict arose, oil prices rose and the markets nosedived. The theme on which the ETF was based—Chinese tech stocks, was particularly badly hit. The fund is down a scorching 41% since launch (as of 15 March).
Other China-themed funds such as Edelweiss Greater China Equity Offshore Fund and Nippon ETF Hangseng BeES are down around 17.5%-23.10% over the past month (as of 15 March).
After a meeting of China’s State Council which was supportive of markets, Chinese stocks saw a rebound on 16 March. The Shanghai Composite Index rose by around 3.5%. However, the rebound came after much larger falls in the Chinese markets in the past few months.
During this period, fresh investments into overseas mutual funds have been suspended on account of the industry reaching the overall limit of $7 billion, preventing investors from buying at lower levels. However, experts are divided on whether the fall in Chinese stocks is indeed a large opportunity.
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“Chinese stocks corrected last week as the SEC in the US threatened to delist Chinese companies that don’t provide adequate visibility into accounting audits. This week, JP Morgan announced double downgrades on three big Chinese tech firms Baidu, NetEase, and Alibaba group. Broader regulatory and geopolitical risks to Chinese stocks persist. In terms of valuations, Chinese stocks are still not very cheap enough to buy," said Menaka Reddy, associate, Investment Research, Stockal, a fintech enabling Indians to invest in foreign stocks.
However, some experts see the fall as a buying opportunity for investors with a long time horizon.
“The Hang Seng index is trading below book value, which has never happened before. I don’t think tech adoption is going anywhere and hence, Chinese tech stocks are likely to eventually recover. At present, overseas mutual funds have stopped inflows since the industry limit has been hit. However, investors can use the liberalised remittance scheme (LRS) of the RBI to take exposure to China by investing through stocks or ETFs located on the US exchanges. However, a 5-7 year time horizon is necessary," said Anup Bhaiyya, founder, MoneyHoney Financial Services.
Edelweiss Mutual Fund also released a note asking investors to remain invested in its China-themed fund. It noted that the fund did not have exposure to any of the five Chinese stocks that were identified by the US SEC as failing to adhere to the Holding Foreign Companies Accountable Act (HFCAA). The AMC noted that the issue may get resolved through negotiations between the US and Chinese governments or the companies in question will find alternative international jurisdictions to list, such as Hong Kong.
Mint Take
Global diversification is an important part of a well-rounded portfolio and Chinese stocks are cheap by historic standards. However, tactical bets such as the fall in Chinese tech stocks are high risk–high reward plays, which are not for the risk-averse. For those who want to invest, such tactical calls should account for a small part of your portfolio.
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