Sheryl Sutherland is looking for high quality companies with strong competitive moats and sound future growth prospects. She says some could be Chinese and shouldn't be ignored

By Sheryl Sutherland*

Not so long ago I read an article entitled “Fund managers retreat from Chinese stocks”. The premise was that despite China’s economic measures, global fund managers significantly reduced their investments in Chinese stocks in October, marking the third month of over USD $3 billion in net outflows, Morgan Stanley reports. European funds spearheaded this exodus, leading to the most substantial underweight position on China by foreign long-only managers since 2018.

October also saw a notable withdrawal from US funds. Investor wariness persists due to China’s shaky economic rebound, underscored by a decline in manufacturing activity. The MSCI China index fell by 4.3%, and the CSI 300 by 3.2% and so on.

This sort of reporting can bring an investor to her knees. How can this sort of information help in making portfolio decisions?

Bearing in mind we are talking about long term – say seven years plus. The answer is not at all.

China’s strengths as well as its weaknesses needs a sober assessment (this of course applies to all markets). There is no doubt that the greater China equities market is currently heading downward. The latest data however, shows some improvement in China’s economy with industrial profits rising for the first time this year, increasing 17.2% yoy – against credit growth has rebounded significantly exceeding expectations with the expected growth contraction easing slightly. This has occurred at the same time as the reported outflows from fund managers.

The issue here for investors and fund managers is not so much the damage to China’s economy but the pain sustained China aversion may cause to diversification efforts. Chinese equities have a combined market value of US$15 trillion, greater than the Indian, French, Japanese and British stocks combined. Moreover, returns are not so closely linked to the performance of the US market.

China’s high savings rate means the country doesn’t need external funding, many companies will barely notice the loss of overseas capital but, companies have benefited from technological, expertise and governance practices that came with the overseas cash. China’s electric car industry may be the most advanced but investment by Telsa spear headed the development.

In the two decades up to 2022 investors in Chinese equities, with dividends reinvested earned around 7%.

Reuters asks the question, have money managers concluded outperformance lies in the past? They suggest further that if even if Xi changes economic course longer term investors will probably trickle in rather than flood back into China.

So, to come back to a portfolio management strategy, in general terms, we should invest in high quality companies with strong competitive moats and sound future growth prospects. Particularly those able to tap into long term trends such as consumption growth, IT development, technology advancement, health care and the growing demand for wealth management business.

For example, Chinese stocks such as Tencent Holdings Ltd (media & entertainment), Alibaba Group Holding Ltd (retailing), CNOOC Ltd (energy), Meituan (customer services), PDD Holdings Ltd (retailing), Kweichow Moutai Co Ltd (food, beverage and tobacco), China Telecom Corp Ltd (telecommunications services), China Railway Group Ltd (capital goods) China Railway Group Ltd (capital goods), China Construction Bank Corp (banks) and Ping An Insurance Group Co of China Ltd (insurance) may fit the bill.

Now go talk about it.

*Sheryl Sutherland is director of The Financial Strategies Group, and author of Girls Just Want to Have Fund$ – Every Women’s Guide to Financial Independence, Money, Money, Money Ain’t it Funny – How to Wire your Brain for Wealth, and co-author of Smart Money – How to structure your New Zealand business or investments and pay less tax. You can contact her here.