International investors focused on China need to accept “having their toes stood on” occasionally in order to benefit from long-term returns and opportunities in the country, argues Ronald Chan, founder of Hong Kong asset management firm Chartwell Capital, and a listing committee member on the Hong Kong Stock Exchange.
This included realising the ideological and cultural differences between Western free-markets and China's economic approach, and being patient in the face of setbacks or difficulties that emerge from China's policy-making.
Mr Chan outlined his views following the regulatory clampdown on stocks in the education, property and technology sectors This includes reforms to the private tutoring sector, valued at between $120-260 billion, which has attracted sustained interest from international investors. The new rules, intended to ease financial pressures on families, include banning for-profit tutoring in core school subjects, and restrict foreign investment in the sector through acquisitions and franchises.
The announcements have resulted in huge sell-offs from investors, with shares of Hong Kong-listed Scholar Education Group dropping 45 percent, while the New Oriental Education & Technology Group plummeted more than 47 percent. In China’s mainland share markets, the CSI Education Index ended 9.31 percent down, its lowest close in 16 months.
Mr Chan does not think this volatile chain of events has made investing in China more hazardous. He believed that political risk was something long-term investors priced in when it came to approaching the market. In his view, it was not a surprise that central government wanted to reign in market tendencies that were cannibalising and monopolistic.
He explained: “Applying a Western mindset to interpreting Chinese policymaking is too binary, and accepting the cultural and ideological differences is part of the investment thesis.”
Commenting on the potential possibility of investor backlash beyond sell-offs, he noted that investors have enjoyed significant returns over recent years, and that occasional set-backs had to be absorbed from time to time.
Mr Chan added: “Investing in China is two steps forward, one step back. If investors are going to dance with China to capture the development and growth of the country, they need to expect to get their toes stood on occasionally.”
Instead of fighting legislative restrictions, Mr Chan suggested investors should focus on non-controversial themes such as the post-pandemic recovery. This includes domestic consumption which, as a consequence retail and hospitality spending, has recovered.
He also recommended investment into local companies, rather than big names with a heavy trading volume.
He said: “We like the quality small to mid-cap companies where we can grasp what exactly is going on in their business, and see the catalysts for recovery and growth. Localised themes are also important, such as the broad spectrum of businesses that will benefit from borders re-opening”
The founder of Chartwell Capital concluded his perspective with some general advice for investors constructing portfolios.
Mr Chan said: “Make sure your portfolio is bullet-proof by having an all-weathered strategy. We like to blend income stocks and quality growth companies that typically move differently and give the portfolio some insulation from volatility and generate more asymmetric returns than a pure beta play.”