China’s rapid and comprehensive response to the Covid19 crisis has hedge fund managers rubbing their hands with glee at the raft of new opportunities available in the world’s most polarising market. 

“I have a lot of scar tissue as a hedge fund manager,” Kevin Russell, chief investment officer at UBS O’Connor said during an interview at Investment Magazine’s Absolute Returns Conference on Thursday.

“But when markets overshoot the way China’s does, combined with its dynamic and comprehensive Covid19 policy response, fund managers like me get pretty excited.”

Following the rapid shutdown, where more than 750 million Chinese were confined to their homes, Chinese authorities rolled out large investments in 5G equipment and networks, industrial internet services, mass transportation, data centres, artificial intelligence, high voltage power generation and electric vehicles. 

“And since China has removed quotas for foreign institutional investors, we can move to take advantage of their fast acceleration out of the crisis,” Russell said. 

 

While Covid19 prompted central banks of developed economies to expand their balance sheets, Chinese banks have extended 12 trillion yuan into the market to increase access to credit and provide liquidity, Russell said. 

A quick analysis of this year’s single-best trade – Chinese mid-cap semiconductor and tech stocks – illustrates just how China’s domestic consumption economy allows it to combat any trade wars with the US, one of the chief concerns investors have when contemplating China. 

“When they were threatened with limitations on importing high-value added tech, they decided to build their own supply chain,” Russell said. 

“So there was enormous domestic support for local tech stocks and semiconductors, which ended up producing the single best trade in the world.” 

Volumes in the Chinese market are driven largely by retail investors, around 82 per cent, who react strongly to policy statements coming out of the government. 

“This creates a very powerful, heavy momentum market that we’re very comfortable trading with and against,” Russell said. 

“The Chinese retail flow should not be dismissed as dumb money, but the market there is prone to short term overreactions in both directions.” 

Aside from the momentum trade, Russell said investors using data science to make decisions have an advantage in China, where quantitative data analysis techniques are less commoditised. 

“Many of the developed markets have embraced natural language processing,” he said. “But it’s relatively new in China so you don’t see the same crowding there, and it’s another source of alpha.”

Russell acknowledges that data points from Chinese authorities need to be treated with a level of skepticism. 

“Those numbers probably aren’t right, but it’s fair to say they are consistently inconsistent,” he said. 

“But I believe they do show directionally the changes in baseline growth.”

When it comes to ESG frameworks, Russell said China still needs to crack down on its sub-par environmental practices in many sectors. 

“It might be a few years before you can put a Chinese stock in your ESG portfolio and be comfortable,” Russell said. “But like everywhere else in the world, the market will get dragged into require clear social and environmental disclosure.”

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