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APD | Despite Covid-19, global investment funds pour more cash into China



By APD writer Alice

As the world's major economies are battered by the Covid-19 pandemic, global investment funds have increased their asset allocations to the Chinese stock market.

The Covid-19, caused by the novel coronavirus SARS-CoV-2 has so far killed more than 4,600 people in China and nearly 320,000 others globally. To control the spread of this pandemic, governments have imposed lockdown orders and restricted business activities, leaving financial markets in a downturn due to fear of a global recession.

When US stocks plunged to three-year lows in March, allocations to Chinese stocks of more than 800 global investment funds reached nearly 25% of the $2,000 billion worth of their assets, according to flow tracking firm EPFR. This proportion increased by 20% over the same period last year.

Despite the impact of Covid-19, Chinese stocks have still been relatively stable. Since the beginning of the year, the Shanghai composite has decreased by 5.73% while the US’s S&P 500 dropped by 8.57%, as of May 18’s close.

“We’re finding that a lot of foreign managers globally are reshuffling their holdings in this turmoil. Allocations to China are something people are looking to increase,” Todd Willits, head of EPFR, said.

EPFR data showed dedicated China equity funds have seen outflows in recent weeks since many of the funds have sold in order to meet redemptions, or customer requests for cash. 

However, EPFR said the outflows are temporary as investment funds across several regions are maintaining their allocations to China at the expense of other markets, as a way to meet overall investment return goals.

For investment funds that are focusing on global emerging market stocks, the average allocation to China is 34%, while that for funds invested in Asian stocks excluding Japan, the China allocation is 38%.

However, escalating tensions between China and the US, the two largest economies in the world, have impacted American investment in Chinese companies.

Even so, investor interest in Chinese equities remains high, even in the US.

On May 8, Kingsoft Cloud became the first Chinese company to organise an initial public offering (IPO) in the US since the coronavirus outbreak. Kingsoft Cloud shares have risen more than 40% in the three trading days since, and the company’s valuation hit $5 billion.

Henry He, CFO of the cloud computing firm, said there was a very high quality order book of the potential share subscription that comprises of high quality long only investors and reputable institutions across all the major countries. 

He expects gross revenue in the first quarter will likely be “no less” than that of the fourth quarter.

Justin Leverenz, a team leader and senior portfolio manager for an emerging market equity team at Invesco in New York, the Chinese stock market represents the next new opportunity thanks to local innovations in health care and technology, when the Covid-19 pandemic is dealing a heavy blow to other major economies.

“Every decade we have a significant bull market in something. China is, even at lower levels of growth, going to be the dominant, the super majority driver of growth over the next 10 years,” he said.


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