The China Evolution Equity Strategy that I manage has what we believe is a unique design among China equity strategies. We invest in the whole of the China equity universe, excluding the top 100 largest listed companies.1 The Chinese stock market has around 6,000 public companies, with fewer than 100 having a market cap above USD 30 billion. However, among mainstream China strategies, many invest around 60% of their portfolio in these mega-cap stocks. So around 60% of assets appear to be invested in less than 2% of the investment universe.2 We regard this as a major disconnect in terms of diversification and breadth of opportunity.
The first objective of the China Evolution Equity Strategy is to offer a unique exposure to the approximate 98% of the opportunities that are under-explored. As a key design feature, we do not aim to invest in the top 100 Chinese mega-cap stocks. A second element of portfolio design is that we take a holistic, style-agnostic investment approach. We are not constrained by growth or value. Rather, we look for stocks that have a combination of fundamental strength and mispricing opportunities. We do this through the process of discovery, deep research, and pattern recognition.
A third feature of portfolio design is a strong focus on alpha generation. We believe that the approximate 98% of the universe that we operate in has more mispricing opportunities and aim to identify these with a flexible investment approach.
Q1: Chinese equities appear to have stabilized since May. Has investor sentiment toward China turned the corner?
Looking back over recent quarters it is clear with hindsight that Chinese equities encountered a "perfect storm." Beijing started to tighten liquidity as far back as the second half of 2020, much earlier than the rest of the world. On top of that tighter macro policy stance, you had all the regulatory actions that took investors by surprise and that lasted throughout 2021.
At the beginning of this year, the new omicron variant of COVID-19 posed a major threat to China's strict zero-COVID policy, plus a new round of geopolitical concerns triggered by the Russia-Ukraine conflict.
Over the past one to two months, we have started to see improvement in many aspects. The policy priority has shifted from tightening to supporting growth. We would expect a more favourable liquidity and regulatory environment for the coming quarters.
The COVID situation has improved, and the supply chain is largely back to normal. We still see small-scale outbreaks in a few cities, which inevitably impact local service businesses. However, we think another major supply chain disruption can hopefully be avoided.
Last, rising raw material prices, which hurt the margins for many Chinese industrial companies, have started to come down. This should help the earnings growth for mid-/downstream companies in China.
1By market cap.
This post was funded by T. Rowe Price
Important Information
For professional clients only. Not for further distribution.
This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.
It is not intended for distribution to retail investors in any jurisdiction.
This material is issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.
© 2022 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.
