China Market Commentary: May 2022
Here are this month’s highlights:
- In April, global markets experienced a major sell-off amid a weakening growth outlook due to heightened inflation, rising interest rates, a slowdown in China and geopolitical uncertainty.
- The offshore China market fared better than its A-share counterpart, with the MSCI China index returning -4.1% versus -10.2% for the MSCI China A Onshore index.
- At RisCura we believe in diversification across different styles and avoid any persistent bias to Value or Growth across most asset classes.
China in May
This month we will tackle the subject of style diversification and our preferred underweight to Value relative to the index.
Underweight to Value
At RisCura we believe in diversification across different styles and avoid any persistent bias to Value or Growth across most asset classes. However, our experience in Chinese equities is different where we have maintained an overweight to Growth and Quality at the expense of Value. This applies even where we have a large number of managers in a portfolio with very different styles including specialist Value managers. We have revisited this bias many times and often debate whether we should proactively reduce it.
The reducing dominance of Financials in China indices
Addressing the underweight to Financials
One of our peer multi-managers addresses this challenge by constantly holding a passive basket of stocks providing defensive, large cap Value exposure in their China equity portfolio. We don’t think that this is the best course of action. It feels wrong to artificially address a benchmark risk that exists for very good reasons.
Saying that we monitor this bias very closely.
To conclude, we have had a persistent underweight to Value despite allocating to a large number of fund managers with various investment styles. Much of this bias results from an underweight to Financials, most of which are state-owned enterprises. These companies have poor governance and are not run in the full interest of their private shareholders. We monitor this position very closely but we don’t believe that this benchmark risk should be eliminated given the importance of ESG in China