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What should investors in China-linked mutual funds do?

The rise in regulatory actions taken against technology giants by Chinese government agencies and more recently disallowing foreign capital in after-school tutoring companies, led to a sell-off in those markets

July 28, 2021 / 02:05 PM IST

The ongoing volatility in Chinese stock markets has taken a toll on Indian mutual funds (MFs) that invest in China and its related regions. Their net asset values (NAVs) have fallen sharply.

Edelweiss Greater China Equity Off-shore fund of fund (FoF) was down 4.16 percent on Monday, while the NAV of Axis Greater China Equity FoF fell 2.95 percent on Tuesday.

Apart from Chinese companies, these funds hold investments in Hong Kong and Taiwanese firms. Hence, these are called greater China funds.

Nippon India ETF Hang Seng BeES, which tracks the Hang Seng Index - benchmark of Hong Kong exchange, declined 4.19 percent on Tuesday.

The rise in regulatory actions taken against technology giants by Chinese government agencies and more recently disallowing foreign capital in after-school tutoring companies, led to a sell-off. So, what should investors do with these schemes? Here is what experts have to say about Chinese markets.

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How long will this volatility last?

When can Chinese stock markets recover and will the regulatory actions have a deeper impact?

Shankar Sharma, co-founder and vice-chairman of First Global,  is taking a cautious stance for now.

“The Chinese government’s policy seems to be clear and the recent situation around Ant Financial (Alibaba Affiliate Company) was a signal. We have been cutting our overall allocation to China after February-March, 2021. We are down to two percent on our China allocation from 12-15 percent,” he says.

Sensing the regulatory troubles around Chinese tech companies, Sharma says their funds for now are invested in traditional sectors such as electrical equipment manufacturers, rather than new-age tech companies.

Other fund managers are of the view that regulatory actions need not be interpreted as the Chinese government’s campaign against its own home-grown tech sector. “Some years back, China had taken regulatory action against its chemical companies to control pollution levels, forcing them to relocate their plants. So, governments can take regulatory decisions to control certain practices in certain sectors, if they feel these are against the interests of the overall society,” says a fund manager, requesting anonymity.

So, could this be an opportunity?

Edelweiss MF, which runs the largest China-linked fund in India, with assets of Rs 1,844 crore, notes that the current pressures may be transitory.

“The regulatory regime currently facing the China internet space is creating short-term headwinds, which may continue for some time. But it is believed that these pressures will ultimately prove to be transitory. The regulatory overhang shouldn’t negatively impact important corporate strengths such as innovation and entrepreneurship,” a note by Edelweiss MF’s fund team read.

The note adds that the Chinese government would want to fix certain areas of regulation, which may have led to certain excesses, such as companies entering into exclusivity arrangements to take advantage of market power.

The note says some companies are likely to face challenges, but some could be in a better position to deal with these pressures.

The fund manager, quoted earlier, says that regulatory actions can impact the business models of some companies, which might find it more challenging to recover.

To be sure, the Edelweiss fund of fund doesn’t have investments in companies in China’s ed-tech sector.

Niranjan Avasthi, head-products, Edelweiss MF says investors who want to invest in a China fund can do so in a staggered manner. “Assuming, an investor has Rs 100, she can invest Rs 50 now and the remaining in a staggered manner,” he says.

The Chinese stock markets can fall further with technology companies carrying high weights in their benchmark indices and there is no saying when or at what levels the stock market will bottom out.

It doesn’t make sense to pull out your money just because of the current volatility, as that comes with any equity investment. But if you have China-specific investments, make sure that it is part of your overall exposure to international equities. Overall, a 10-15 percent investment to international equities is desirable. Just make sure you are comfortable with the risks associated with Chinese equities.

Disclaimer: The views and investment tips by experts on Moneycontrol.com are their own and not those of the website or its management. Users are advised to check with certified experts before taking any investment decision.
Jash Kriplani is a journalist with over ten years of experience. Based in Mumbai. Covering mutual funds, personal finance. His last stint was with Business Standard, where he covered mutual funds and other developments in the financial markets
first published: Jul 28, 2021 01:58 pm
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