GQG Fund That Exited China Internet Stocks Is Making A Comeback

(Bloomberg) -- A top-performing emerging-market stock fund that sold off its China internet holdings last year is slowly rebuilding the exposure, citing improved tech earnings and Beijing's friendlier policy toward private enterprise as reasons.

The $13.7 billion GQG Partners Emerging Markets Equity Fund began adding positions in Chinese platform companies in the second quarter this year and has raised the country's weighting in its portfolio to mid-teens, according to Sudarshan Murthy, one of its portfolio managers. The weighting was about 12% at the end of June. That's versus less than 11% as of March 31, according to data compiled by Bloomberg.

“We are seeing growth coming back in terms of the quarterly results, and the crackdown is likely coming towards an end, like we saw some high-profile announcements made about the importance of the Internet platform sector,” Murthy said. “We are slightly more optimistic on China than we were three months ago.” 

GQG Partners' investments have become a talking point in equity markets this year owing to the bullish bets it has made on shares of India's Adani Group — the embattled power-to-port conglomerate that saw an unprecedented rout after being rocked by a scathing short-seller report in January. The EM fund, one of the world's biggest, has beaten 97% of its peers this year partly due to its thin exposure to China.

The fund's return to Chinese shares comes just as investor pessimism is intensifying amid disappointing economic data and policy response, a deepening property crisis and signs of stress in the shadow banking system.

The tech sector though has witnessed some silver linings in recent days, with behemoths from Alibaba Group Holding Ltd. to Baidu Inc. reporting consensus-beating earnings. Forward profit estimates for gaming bellwether Tencent Holdings Ltd. have climbed to near an early 2021 peak, while those for food delivery firm Meituan have more than doubled this year, suggesting that confidence is returning after a years-long official crackdown on the sector.

Murthy said the fund is investing in Chinese gaming and food delivery companies. The e-commerce sector's “competitive intensity is still too high among the top three players,” he said in an interview last week, declining to name any of its investments. The fund also has bets on state-owned industrial and insurance firms.

‘Western Playbook'

The fund's overall China weighting remains far below the 28% level in the MSCI Emerging Markets Index and the average 26% for the world's 10 largest EM equity funds as of the end of July, according to Bloomberg-compiled data. India and Brazil carry far heavier weightings in its portfolio.

However, Murthy's views appear less pessimistic at a time when global investors are shedding China's blue-chip stocks in what's been a record-selling streak. The outflows have come even as policymakers have made efforts to bolster confidence, including a notable shift in official rhetoric and regulatory stance toward private enterprise, especially the tech firms.

“Some of the worst case scenarios that people worry about, especially people who use a Western playbook, might be exaggerated. The Chinese state will resolve those issues over time,” Murthy said. “That said we are still cautious, still underweight the benchmark.”

--With assistance from Irene Huang.

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