Endowus Satellite Portfolios: On China equities — a 2022 update

What's the outlook ahead for China stocks?

The Chinese equities market has been hammered by the country’s strict lockdowns to contain Covid-19. While the rest of the world opens up with the global rollout of vaccines, the country with the world’s largest population has been resolute in keeping quarantine measures in place. To be sure, China has recently allowed for some easing measures in large cities like Shanghai, prompting opportunistic traders to hunt for stocks that could benefit from the reopening.

The chill on the technology sector has also hit Big Tech companies in China. The pressure comes on top of concerns that the authorities are keeping a tight watch over the leaders of these tech firms, which hold a swathe of data on Chinese citizens.

The Endowus Investment Office continues to believe in the long-term growth of China. With the easing of some Covid-19 restrictions, there has already been a rally in the China equity market. Investors are optimistic about domestic consumer demand picking up and the economy getting back on track after being derailed by the pandemic over the past three years.

JP Morgan Asset Management (JPMAM) expects to see continuous accommodative policies and a gradual relaxation of China’s zero-Covid policy in 2023. These could help stabilise Chinese asset prices, the firm says in a recent report. JPMAM manages the China A-Share Opportunities Fund, which is part of the Endowus China Equities Portfolio. 

In addition, the Chinese government’s plans to bring about high-quality growth and structural improvement in the economy may well lead to opportunities for the domestic hardware technology sector, JPMAM suggests.

The green agenda, meanwhile, is still alive in China — President Xi Jinping has reiterated the country’s pledge to become carbon-neutral by 2060. Abrdn highlights that huge investments in renewable energy and storage are required to decarbonise economies. In particular, the fund manager expects more investments to flow into upgrading machinery and improving energy efficiency. Companies focusing on renewable energy, electric vehicles (EVs), batteries, and other related infrastructure will stand to benefit from this shift, says Abrdn, which manages the AS SICAV I - China A Share Equity Fund.

The Endowus China Equities Portfolio, as it stands at the time of writing, is likely to enjoy tailwinds from these upcoming trends, given its healthy exposure to the Chinese information technology sector and green energy.

How we constructed the Endowus China Equities Portfolio: a recap

The Endowus China Equities Portfolio is designed to efficiently capture the best opportunities in both onshore and offshore Chinese equity investing.

The portfolio is designed to give access to the opportunities in China and the Greater China universe, and taps into the various types of Chinese equities, such as:

• Onshore China equities: Chinese companies listed within mainland China (Shanghai and Shenzhen), also known as China A-Shares or B-shares;
• Offshore China equities: Chinese companies listed on stock exchanges outside of China, such as in Hong Kong (H-Shares), or even the US (ADRs) or other offshore markets where Chinese companies are listed;
• Greater China equities: Companies from Hong Kong, Taiwan, and Macau listed in their respective stock exchanges; and
• Other equities: Companies from countries with no cultural ties with China, but are listed in stock exchanges within Greater China, or companies that have a significant business dependency to China.

China has seen rapid growth, undergone significant structural reforms, and become the world's second-largest equity market with return opportunities across various new and traditional sectors. The Endowus China Equities Portfolio allows investors keen on China exposure to navigate this market through leading experts who have invested in China for decades.

Underlying funds of the Endowus China Equities Portfolio

Portfolio allocation of the Endowus China Equities Portfolio

2022 performance

The Endowus China Equities Portfolio registered negative returns in the third quarter of 2022. One of the major detractors from performance was the portfolio’s underweight to energy names, which rallied over the quarter. On the positive side, strong returns from the information technology (IT) sector and an underweight to the consumer discretionary sector contributed meaningfully to performance. 

On a year-to-date basis, as of 31 Oct 2022, the Endowus China Equities Portfolio returned -37.0%, which is roughly in line with the MSCI China All Shares Index’s return of -36.4%. The portfolio tends to have a heavier allocation to China A-shares than the MSCI China All-Shares Index does — around 70% in the portfolio, versus 50% in the index — which can lead to a difference in the performances of the index and the portfolio. 

A number of the portfolio’s underlying funds have a growth and quality bias, as well as an underweight to energy names, in comparison to the index. These biases detracted from relative performance in the year-to-date period.

Endowus China Equities Portfolio returns

Read more: The top four questions we get on investing in China

A core-satellite approach

Launched in November 2021, Endowus Satellite Portfolios are used to supplement the core portfolios and are meant to express an active decision by the investor to provide further diversification opportunities to try to generate alpha (above market returns), or to express a specific investment view or strategy. This can be done through a single fund or a portfolio of funds. 

Here's how satellite strategies differ from that of core portfolios:

• They tend to be more concentrated in nature and narrow in exposure, targeting a certain sector or country or theme, as compared to the passive broad market exposure of core portfolios.
• While they may follow an index and can be passive, most satellite portfolios and funds tend to be active in the way they invest and seek to generate alpha.
• The investments tend to be shorter term in nature and reflect tactical or opportunistic investment strategies, as opposed to the strategic nature of core investments.

Find out how our other Satellite solutions have performed in 2022 — click here to read about the Endowus Technology Portfolio and the outlook on tech stocks, or follow this link for an update on the Endowus Global Real Estate Portfolio.

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