First inflows for China equity funds in 11 weeks
China equity funds have snapped out of their 11-week outflow streak to start Q3 with the bulk of the money going into China-domiciled exchange trade funds, according to EPFR Global.
The research house found the 11 weeks of outflows amounted to US$18 billion ($25.8 billion) but that investors had returned to the asset class as the Shanghai Composite index was up 18% since the beginning of June.
“…Macroeconomic indicators for the Chinese economy such as house sales and private business investment are looking up. Low yields for money parked in Chinese Money Market Funds are also prompting domestic investors to look for alternatives,” it said.
The rush to Chinese equities also broke the second-longest outflow streak (20 weeks) for emerging market equity funds since EPFR had started tracking them as outflows were still recorded for EMEA and diversified global emerging market equity funds, and funds focused on India, Korea, Russia and Mexico.
It noted that emerging market equity funds with a socially responsible or environmental, social, and governance (ESG) mandate posted inflows for the 14th time in the past 15 weeks.
According to Bank of America data, Chinese equities took the top spot for ranked equity returns so far this year at 17.1% in USD terms, and was only one of five equity markets making a positive return.
FE Analytics data reflected the Chinese equity demand in the Australian market with the top performing China-focused equity fund, within the Australian Core Strategies universe, since the beginning of the year to 30 June, 2020, being VanEck – Vectors China New Economy ETF at 27.9%.
Performance of China equity funds v sector and indices since start of 2020 to 30 June 2020
Source: FE Analytics
The VanEck fund and the second-best performing fund, Vasco ChinAMC China Opportunities fund (12.2%) have both managed to recover losses from the global sell-off in February/March, induced by the COVID-19 pandemic.
The Premium China fund returned 1.37% and Fidelity China fund lost 10.17%. These two funds did not beat the FTSE China or MSCI China indices (6.48% and 5.69% respectively), and the Fidelity China fund did not beat either Asia Pacific ex Japan sector average loss of 1.99% or the Asia Pacific Single Country sector average loss of 4.55%.
Performance of China equity funds v sector and indices since over three years to 30 June 2020
However, over the three years to 30 June, 2020, no funds beat the MSCI China (42.5%) or FTSE China (41.58%) indices. The best performing fund during this time was the Vasco fund at 37.4%.
Premium China fund followed at 19.5%, and Fidelity China fund at 16.8%. The VanEck fund was only launched in November 2018.
Outlook
Aberdeen Standard Investments head of China equities, Nicholas Yeo, said the recent sharp rally in China’s CSI300 index – top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange – was a reminded that it was an inefficient, retail-driven market.
“Investors will see more periods of overbuying. What’s important is not to follow the market blindly. What we have seen is a rotation out of quality companies in defensive sectors such as health care and consumer staples – segments where we forecast structural growth as disposable incomes continue to rise. This is creating buying opportunities for active, long-term investors such as us,” Yeo said.
“While investors can expect a market correction, there remain reasons to be positive on the A-share market’s longer-term outlook. As China transitions away from reliance on exports, its growth will be driven by domestic consumption and a rising middle class. That will create opportunities to invest in quality companies in consumer discretionary and consumer staples, health care and financial services.
“We are also seeing a growing understanding that improved ESG standards can be a driver of shareholder returns. Further, while mindful of richer valuations, we anticipate opportunities to invest in areas that will benefit from the change in work and consumption patterns due to the COVID-19 pandemic, such as plays on cloud computing, cybersecurity and data centres.”
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