Wednesday 07 Jun 2023
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This article first appeared in Wealth, The Edge Malaysia Weekly on August 23, 2021 - August 29, 2021

Investors in China’s listed companies have been on a rough ride in recent months due to regulatory crackdowns on multiple sectors. Uncertainty remains as investors try to identify which sector is the next target, all while US-China tensions continue to develop in the background.

However, Value Partners Asset Management Malaysia Sdn Bhd believes the long-term potential of investing in China is still there. Its confidence in the market is based on its projection that China will become the largest economy in the world by 2035, with a large middle class that will drive its domestic consumption.

“I think the key message that China is trying to put out now is that the economy is still going strong and it is committed to liberalising the market … It is also focused on the common prosperity goal, where it wants to reduce the inequality in key sectors such as education and broaden social coverage to all people,” says Kamal Mustadza, fund manager at Value Partners Asset Management Malaysia.

“We can probably look at the current situation as a short-term pain but long-term gain. We admit that the uncertainties due to the regulatory crackdown may be there for a while, but for the long term, we are still bullish on China.”

In July, the firm successfully listed the VP-DJ Shariah China A-Shares 100 ETF (exchange-traded fund) on Bursa Malaysia. It is the world’s first ETF that tracks the Dow Jones Islamic Market China A-Shares 100 Index.

China A-shares refer to stocks listed on the Shanghai and Shenzhen stock exchanges, which encompass over 4,000 companies. The Value Partners Group, which is headquartered in Hong Kong, is a well-known value investor in Asian markets that has been operating since 1993.

This is the third ETF listed in Malaysia that invests in China equities. The other two ETFs, however, do not track the China A-shares market.

It is a misconception that the regulations imposed by the Chinese government on data security and the private tuition sector, for instance, are meant to stifle business activities, says Durraini Baharuddin, managing director at Value Partners Asset Management Malaysia.

She likens the move to the way investors use environmental, social and governance (ESG) criteria to assess businesses, even if it disrupts business-as-usual activities in certain industries. “In the private tuition sector, they are trying to address the situation where one can be disadvantaged due to one’s income levels, which will affect long-term social harmony,” she says.

Another positive factor for China is its ability to contain the spread of the pandemic compared to other countries. It was the only major economy to record positive growth in 2020. In July, the International Monetary Fund projected that China’s economy will grow 8.1% in 2021. This is higher than its global growth forecast of 6% and its projection for the US and the UK.

Could US-China trade tensions derail this positive outlook for China? In July, the US banned investments in 59 Chinese companies, after it threatened to delist Chinese companies from US stock exchanges.

“I don’t think we will see trade issues being resolved anytime soon. The rhetoric is the same despite a change in the US administration. Its stance on China is the only thing that unites both sides of the political divide,” says Kamal.

However, he notes that China has been cooperating in some ways to reduce the trade surplus with the US. China can also mitigate this external risk by focusing on its dual circulation economy and boosting domestic consumption.

“In its five-year plan, it already targets to increase the middle-class population by 2025. We believe this can be easily achieved and help mitigate the trade tension,” Kamal adds.

Investing in the drivers of China’s economy

The China A-shares market is not easily accessible to foreign investors, who need to go through the Stock Connect or the Qualified Foreign Institutional Investor systems. Many sources have highlighted how this situation has resulted in the underrepresentation of China A-shares in global equity holdings.

However, in terms of market capitalisation, the China A-shares market is one of the largest in the world at over US$6 trillion (RM25.4 trillion). That is why Value Partners believes that an exposure to China A-shares is necessary, especially one with a shariah lens to cater for investors with this preference.

The ETF structure will allow investors to have broad exposure to all companies in the index. The underlying index has 100 constituents, and its biggest sector exposure was in healthcare (23%), consumer discretionary (21%) and technology (15%) as at Aug 13.

These sectors are the new economic drivers of China for the coming decade, Kamal believes, as they are aligned with the government’s focus on domestic consumption, green economy, technology globalisation and market liberalisation.

“For instance, although Contemporary Amperex Technology Co Ltd is listed under the industrial category, it is actually the largest manufacturer of electric vehicle batteries. While China Yangtze Power Co is under the utilities category, it is the largest hydropower generation company in the world, and is aligned with China’s target to increase hydropower as a source of renewable energy,” says Kamal.

Promoting ETFs in Malaysia

In July, Wahed Technologies Sdn Bhd, which runs the digital Islamic investment manager Wahed Invest, announced that it would include the VP-DJ Shariah China A-Shares 100 ETF in its portfolio.

The robo-adviser is currently the only one in Malaysia that includes locally listed, shariah-compliant ETFs on its platform. The others either invest in US-listed ETFs or unit trusts.

This inclusion is conducive to increasing the flow of funds into local ETFs, observes Durraini. “Robo-advisers have become the intermediary between investors and ETFs. Traditionally, this would have been done by a remisier or broker. We applaud Wahed for doing this. With a daily flow of funds into the ETF, it will create more liquidity and buying activities in the market,” she says.

Last year, global fund inflows into ETFs broke historical record by attracting US$500 billion worth of investor money globally, according to Morningstar. This record was again broken in July this year when US$512 billion of fund inflows were recorded.

Meanwhile, there are 19 ETFs listed in Malaysia. In 2020, the total market capitalisation of the ETFs was RM2,233.63 million, while the total value traded was RM320.88 million, according to Bursa Malaysia.

“The advent of robo-advisers is going to spearhead more ETFs in Asia. Although Hong Kong and Singapore are ahead of us in this, they are still behind the US. Robo-advisers will bring the ETF market forward,” says Durraini. She adds that Value Partners works closely with its market makers to create liquidity in the market.

A strategy for 2021

Malaysian investors are likely to stay defensive in the second half of the year, as rising Covid-19 cases and political turmoil create uncertainties in the market, says Kamal. However, things could turn around by the fourth quarter of the year, when higher vaccination rates may lead to a full reopening of the economy.

On the global front, the economic recovery theme could give way to a more earnings-driven market as corporate earnings in countries such as the US improve, says Kamal. However, given the uneven recovery in different markets and sectors, investors should take a balanced and diversified approach.

“This can be done by including both defensive, high-quality big names and beneficiaries from the global recovery in your portfolio. For Malaysian investors, it’s alright to still look at domestic counters, especially the high-yield ones. But at the same time, you should start looking at diversification into the broader market and foreign assets,” says Kamal.

His view is shared by Durraini. “You need to diversify away from the short-term volatility that is expected in Malaysia, given the pandemic situation and political changes, and diversify into other markets with a well-managed foreign exchange risk.”

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