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The Biden administration is meeting with China’s top diplomats this week to try to repair a relationship between the two superpowers that has grown rocky.
The question facing financial advisors and investors now is whether they should do the same resetting with Chinese stocks.
Secretary of State Antony Blinken and National Security Adviser Jake Sullivan have a series of meetings starting Thursday with Chinese Foreign Minister Wang Yi to discuss China’s role in global affairs, including the Israel-Hamas and Russia-Ukraine wars. Those meetings could set the stage for a summit between President Joe Biden and Chinese President Xi Jinping next month at the Asia-Pacific Economic Cooperation forum of leaders gathering in San Francisco.
While politicians from the U.S. and China plot out a new political path forward, financial advisors can use the occasion to reassess their view of Chinese stocks, which have been struggling this year. The $6.9 billion iShares MSCI China ETF (MCHI), which boasts technology and retail giants Tencent Holdings (13.3%) and Alibaba (9.1%) as its two largest holdings, is down 7.5% year to date.
Not faring much better of late is the once unstoppable Chinese economy. Earlier this month, the International Monetary Fund lowered its growth forecast for China to 5% this year and 4.2% next year as a result of worries about its real estate sector.
Meanwhile, on this side of the Pacific, the SPDR S&P 500 ETF Trust (SPY) tracking America’s largest corporations is up 9% so far in 2023, as the American economy continues to outperform Wall Street’s best expectations.
Despite the divergent performances, Ben Harburg, portfolio manager for the recently launched Core Values Alpha Greater China Growth ETF (CGRO), believes the China story is misunderstood, at least by investors.
“I think we’re at a different point in the cycle from America. We’re coming out of zero Covid now, and the Chinese have drip-fed the stimulus,” he said. “But our expectation is that coming into Q1, we’re going to see a more robust stimulus push and we should outperform the U.S. in 2024.”
Harburg believes that many wealth managers are shying away from China for “non-fundamental reasons,” primarily geopolitical ones.
“They’re afraid that they’re going to be called up in front of their investment committees and asked why they invested in a stock that has kind of a dual use, civil-military application,”he said, adding, “If everyone’s running for the hills, it’s got to be the most overwhelming contrarian trade of the year.”
No matter, says Scott Bishop, managing director at Presidio Wealth Partners, who prefers to steer clear of Chinese companies as a result of potential Chinese Communist Party influence in their operations.
“I generally avoid areas that have undue government influence because they tend to care more about their own interests and power than the shareholder,” he said.
Bishop also pointed out that many international oil companies have seen significant losses after investing in autocratic countries like Venezuela and Russia.
“Big oil companies like Exxon and Shell invested in areas like that only to find their assets nationalized or their deals renegotiated,” he said. “You also have government influence on executives like Jack Ma with Alibaba, who went missing for a while.”
Along similar lines, Jon Swanburg, president of TSA Wealth Management, is negative on Chinese stocks and has reduced exposure inside of his emerging markets allocation. To that end, he holds the iShares MSCI Emerging Markets ex China ETF (EMXC), which is up 1% year-to-date.
“At this point, China is facing a lot of headwinds, and political risk is something most of our clients would rather avoid if possible,” Swanburg said. “Using an ETF that maintains the emerging market exposure without the inclusion of Chinese companies is an easy way to do that for the small portion of our client portfolios allocated to the emerging markets.”
Christopher Mankoff, financial advisor with JTL Wealth Partners, is negative on the outlook for China because of economic concerns, as well as the failed rally in Chinese stocks.
“The property sector in China is struggling and economic growth is not looking great, so I have stayed away from China. The reopening play on Chinese equities never materialized and the reopening Covid gains on the China Shanghai Composite were recently wiped out, making exposure to Chinese equities high risk,” Mankoff said.
Jack Heintzelman, financial planner at Boston Wealth Strategies, also says rising geopolitical risks over the past few years have made it more difficult to allocate to international and emerging markets. As a result, he prefers to use active managers that can be strategic and intentional in the companies that they own, including in China.
“There are still good-quality companies across the world, so it’s important to focus on the quality fundamentals of those companies that can continue to be resilient in these times of struggle,” Heintzelman said.
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