A major Asian fund manager has sold off all its positions in Chinese stocks as the threat of a trade war with the US grows more intense.
John Foo of Kingsmead Asset Management has revealed in an interview that he completely sold out of all stocks in China about two months ago. Kingsmead, based in Singapore, manages both long-only funds and a hedge fund worth about $60m, all focused on Asian markets.
Foo, who has been managing funds for 20 years, said that he made the decision to drop all his Chinese assets for the first time in his career as Chinese domestic credit availability tightened and trade tensions intensified. He said that while there are plenty of cheap Chinese stocks on the market, there is too much uncertainty involved. In the past, Kingsmead has put up to 40% of its net exposure into Chinese stocks, mostly ones listed in Hong Kong and the US.
The decision has proved insightful, as fears of a trade war between China and the US intensified this week, with the yuan falling as much as 3% over the past two weeks and Forex traders beginning to talk about the danger of contagion to overseas markets. The situation brings back memories of 2015, when the renminbi lost 2.8% of its value over three days. The benchmark Chinese stock gauge this week was approaching levels last seen during panic selling in 2016.
Foo said that he would need to see some significant changes in the situation in China before he would consider moving back into Chinese stocks. He said that he would need to see a 7.5 yuan to the dollar exchange rate, a 30% drop in valuations and ‘some significant deleveraging’ before Chinese assets would once more be attractive.
Returns for the Asia hedge fund at Kingsmead are down 7% this year due to the fact the fund does not hedge against currency risk and most currencies in Asia have fallen against the dollar. It is still competitive, however, returning 22% last year while similar funds only manage 20%.
The stocks that Kingsmead sold off included car dealers, who are in the firing line as the Chinese government intends to add a 25% import duty on US-manufactured vehicles as part of the escalating trade war between the two countries. These dealerships are also being harmed by tighter government regulations on credit availability to counter high levels of household debt in China. Kingsmead also sold off stocks in Chinese financials and companies dealing in export operations.
Hedge funds making the decision to move out of China is good news for Vietnamese companies, with Kingsmead taking positions in real estate broker Dat Xanh Group and Vietnam’s largest steelworks company, Hoa Phat Group. These companies are starting to prosper as the country sees rising demand for property and infrastructure.
Foo also said that Kingsmead is interested in investing in the Mekong River region through Laos, Cambodia and Myanmar, which is likely to suffer less from a China-US trade war. It is an area that may benefit, as companies will have more incentive to move their operations there.
Foo added: “The beauty of these stocks is they all have single-digit price-earnings with over 20% growth in the next two years or more.”
Kingsmead is not the only hedge fund to offload Chinese stocks, with Pinpoint Asset Management, SPQ Asia Capital and FengHe Fund Management all cutting their net exposure to stocks in China and looking towards Vietnam instead.