China’s Best-Performing Hedge Fund Is Up 138% This Year. Here’s Its Next Play.

China’s Best-Performing Hedge Fund Is Up 138% This Year. Here’s Its Next Play.
Carl Hazeley

almost 2 years ago3 mins

  • Chinese stocks are down 20% this year, but one rockstar investor says now’s the time to buy the dip.

  • China’s lockdowns are easing, there’s economic support on the way, and international investors have started buying up the country’s stocks again.

  • Zhao’s positive on consumer discretionary stocks and autos in particular, while technology hardware stocks might also be an attractive bet.

Chinese stocks are down 20% this year, but one rockstar investor says now’s the time to buy the dip.

China’s lockdowns are easing, there’s economic support on the way, and international investors have started buying up the country’s stocks again.

Zhao’s positive on consumer discretionary stocks and autos in particular, while technology hardware stocks might also be an attractive bet.

Zhao Yuanyuan – a hedge fund manager at Shenzhen Qianhai JianHong Times Asset Management Co – has made some big bets on infrastructure, energy producers, and Covid-19 drugmakers lately, while shorting the rest of the market. And it’s paid off: her fund has climbed 138% this year, ranking it the best-performing of over 20,000 private Chinese funds. And now she’s found her next target: buying China’s dip.

Why is Zhao optimistic about China now?

China’s key stock market index has had a terrible year so far: it’s dropped 20%, compared to even global stocks’ 16%. But Zhao’s probably betting that investors’ pessimism has peaked. And it’s easy to see her point: lockdowns are easing in places like Shanghai and an estimated $5 trillion worth of economic support has already been announced this year.

In the past week, her fund has started reversing some of its negative – or short – bets on China. But she’s stopped short of becoming entirely bullish for now. New Covid outbreaks could push her more toward caution, while a further easing of the government’s Covid restrictions could push her more toward the positive.

But it’s not just the lifting lockdowns that’s fueling Zhao’s optimism. Foreign investors are piling back into mainland Chinese stocks at their quickest pace all year. That could be because we’re at a point now where a recovery in Covid-hampered earnings and stock market valuations are both turning a corner for the better.

Foreign investors buying into China

What’s the opportunity here?

Zhao’s fund profited from being “net neutral” earlier in the year, and is poised to profit now from being “net long” stocks, with about 60% of its money is invested in ways that’ll benefit from the stock market rising. And Zhao is betting the consumer discretionary sector in China, especially autos and autos suppliers, could gain the most during a rally.

The Global X MSCI China Consumer Discretionary ETF (ticker: CHIQ, expense ratio: 0.65%) is one way to play the potential upside to consumer discretionary stocks, with investments in large- and mid-sized companies in the MSCI China Index. And the Global X China Electric Vehicle and Battery ETF (Hong Kong ticker: 2845, US ticker: 9845, expense ratio: 0.68%) could be a good way to benefit from a boost to China’s auto industry which, like much of the world’s, is becoming electrified.

In addition to Zhao’s ideas, it’s worth reiterating one from Clocktower Group late last year, which is to buy Chinese technology hardware stocks. See, the Chinese government largely left hardware makers alone, even as it cracked down on the country’s software giants. There’s high demand globally for semiconductors, green tech, materials, and energy, and several Chinese companies that are well placed to benefit from it.

There are a few ETFs to choose from here: the KraneShares CICC China 5G and Semiconductor Index ETF (ticker: KFVG, expense ratio: 0.78%) offers exposure to Chinese hardware, or, to put a greener hue on these investments, you could go for the KraneShares MSCI China Clean Technology Index ETF (ticker: KGRN, expense ratio: 0.78%).

Investing in semiconductors is particularly timely given the rising tensions between China and Taiwan, with the latter home to the Taiwan Semiconductor Manufacturing Company (TSMC) – one of the world’s largest chipmakers, responsible for 90% of the global supply of advanced semiconductors. If those tensions escalate, buying into semis could prove a shrewd investment – even as buying into China overall could become even riskier.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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