Over the past couple of years, investing overseas has become a viable avenue to diversify investment portfolios. Asset management companies have introduced a bouquet of funds that offer investment primarily into the U.S. market, but also in the Chinese market—either directly or through Hong Kong-focused mutual funds.
While the thesis of diversification is sound, investors into China-focused funds have lost significant ground over the past year. A growth slowdown in the world's second largest economy has resulted in funds with sizeable exposure to Chinese companies losing 35-42% in the 12 months to Oct. 28.
Negative China developments
China has seen a number of negative developments over the past year. For one, the Chinese government has adopted a zero-Covid policy to curb the spread of the virus that originated in China. As a result, several parts of the country have entered lockdown repeatedly.
The economic impact of this approach has been severe, with gross domestic product growth falling and the country's fiscal deficit also ballooning, putting pressure on the yuan.
GDP growth in the third quarter of 2022 stood at 3.9%, up from 0.4% in the second quarter.
A disruption in the country's crucial property market has not helped matters. Property developers are defaulting on loans and home loan borrowers are refusing to pay instalments as their properties remain unfinished.
Xi Jinping Consolidates Power
Chinese President Xi Jinping has secured a third five-year term in power. Soon after the announcement to that effect, the stock market in China fell, as investors anticipated that ideology-driven measures will continue to be introduced.
Over the past couple of years, the Chinese government has cracked down on technology companies, wiping out billions of dollars of investor wealth.
China's tough stance on Taiwan is also expected to increase friction with the U.S. and could have economic repercussions.
Impact On China-Focused Funds
A few mutual fund schemes in India have a large exposure to Chinese companies.
The Axis Greater China Equity Fund of Funds invests in the Schroder ISF Greater China Fund, which in turn invests in companies in China, Hong Kong and Taiwan. The fund has seen a negative return of 36% over the 12 months to Oct. 28.
Edelweiss Greater China Equity Offshore Fund invests in the JP Morgan Greater China Fund, which in turn invests in companies in China, Taiwan and Hong Kong, has also taken a big hit with a negative return of 42% over the past one year.
Even Nippon India ETF Hang Sang BeES, which invests in the Hang Sang Index, has seen a negative 35% return in the last one year. A large part of the exposure of the index is in Chinese companies.
Mirae Asset Hang Sang TECH ETF has an exposure to technology stocks on the Hong Kong index, which are mainly Chinese companies, and has not yet completed a year. The fund has lost 25% in the last six months and 35% in the last three months.
Investor Action
Investors who have an existing exposure to the China funds have already seen the impact in terms of the fall in the Net Asset Value of the fund.
There is not much sense to exit from the funds at this stage because the negative impact has already been seen. So, holding on and waiting for a recovery is a better strategy. In terms of adding new investments, it is important to check whether the fund house is accepting new investments.
Following an initial halt to direct foreign investments, some fund houses had opened a window for specific funds. Any incremental investments should be done only if one has a long-term perspective. A near-term recovery may not be on the cards.
(Arnav Pandya is founder of Moneyeduschool.)
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