In global terms July was a positive month for equities with the MSCI World index gaining 1.14%, taking gains in the year to 30th July to 13.14%.However, Chinese equity markets saw significant volatility in July. The cause was that Chinese authorities intervened within the private education sector in China, stating that these companies would have their profits restricted and should not raise capital. This follows on from previous interventions in the financial technology, internet applications and property development sectors. Stock markets in Mainland China and Hong Kong were rattled, with the CSI China Securities 300 index falling -7.83% and the Hang Seng index falling -10.22% in July. They have since recovered some lost ground, with the CSI China Securities 300 index regaining 4.83% and the Hang Seng up 2.77% between 30th July and 10th August 2021.
The volatility in Chinese stock markets has had a limited impact on MFDM Model Portfolios because the exposure to China and Hong Kong within them is in the range of 2%-7%. All of the MFDM model portfolios achieved positive growth in July. This is due to our diversified active management approach with both fixed interest and equities in all portfolios, together with geographical diversification. Whilst our Asia Pacific and Global Emerging Markets fund choices faced a headwind in July due to their exposure to China, other funds which invest in fixed interest, European equities, UK equities, US equities, India equities and our global equity ETF choice all made a positive contribution. The performance of MFDM model portfolios since launch on 11/03/2020 also remains strong and our Investment Team will continue to closely monitor portfolio performance.
It’s important to understand there are clear policy motivations for each action by the Chinese government in the last 6 months or so. The actions against Ant Financial were meant to rein in shadow banking. The actions against internet companies Tencent, Alibaba, Baidu were to ensure competition in the sector and prevent monopoly power. The actions against Didi (a similar company to Uber) were meant to protect data. The recent actions against the for-profit education sector are meant to ease the financial burden on households for education and to ensure equality, it also ties in with the aim to increase the birth rate so families can afford more than one child now it is allowed.
We recognise the potential for volatility within the Chinese equity market due to periodic interventions by the Communist Party to fulfil social and political objectives. However, given the size and strength of China’s economy we do still consider it important to have some exposure to this potential growth and are not planning any changes to the very moderate exposure in the range of 2-7% within portfolios at this time. We will of course continue to monitor the situation, but in terms of where our Asia Pacific and Emerging Markets funds invest they have exposure to the following long term trends: 1) Dominant consumer franchises and brands which should benefit from rising affluence in China, Hong Kong and Taiwan. 2) Banks and high quality financials which should benefit from increasing use of financial services due to demographics, rising incomes and urbanisation. 3) Companies providing drugs and medical services which should benefit from an increased focus on healthcare spending and wellbeing.
Overall we remain positive about the potential for global equities. The US and UK are well along the path of vaccine rollout and economic re-opening and areas which have lagged in vaccine roll-out, such as Europe and Japan, are now catching up. Unless a new variant of COVID-19 emerges which is resistant to vaccines, we anticipate an environment of economic recovery into 2022, with both monetary and fiscal support in place. Risks include any changes in central bank policy such as higher interest rates to damp down inflation and any continued supply chain issues as the global economy re-stocks following the disruption created by the pandemic. We will continue to keep a close eye on economic data and keep you updated.
This article is for information purposes only. It does not constitute investment advice and is not a recommendation to invest. The value of investments and the income from them may go down as well as up and you may not get back your original investment. Past performance is not a guide to the future.
Date of publication: 13 August 2021
