Few topics hold a consensus in Washington these days, but a negative view toward China is one theme that gains traction on both sides of the aisle. Politics can strongly influence investing, of course, especially amid concerns of American national security.
To navigate the complexities of investing in China without potentially supporting companies that could pose a threat to U.S. national security, values or economic security, CoreValues Alpha, a product of PowerFunds, an affiliate of MSA Capital, launched the CoreValues Alpha Greater China Growth ETF (CGRO) in October 2023.
As the Portfolio Manager for CGRO, Ben Harburg shared his views on investing in China with us. We asked him about the problems and risks of investing in China, reasons why an advisor should still consider China, how to navigate the problems and his 2024 outlook for China’s economy.
WSR: What problems are advisors encountering on including China-based investments in client portfolios? What are the risks and challenges?
Harburg: Global investors, particularly those in the West, are hesitant to take on China exposure for three core reasons: poor recent returns (particularly on a risk-adjusted basis to the United States); feelings of opacity and unpredictability in China, particularly regarding regulatory interventions in the private sector; and geopolitical tensions, highlighted by a fear that investing in China could land someone afoul of U.S. sanctions at worst, and at best aid in an enterprise that compromises U.S. national security or values.
WSR: Why should advisors consider China-based investments? What unique characteristics can China-based investments bring to portfolios?
Harburg: There are a host of reasons, but we primarily point to five. First, there is an arbitrage opportunity when capital is exiting the market for non-financial reasons, not driven by fundamentals. The economic cycles are also decoupled between the U.S. and China, meaning the U.S. could experience recession in 2024, while China is poised for growth. Next, there is a long growth curve in China opportunities relative to the saturated U.S. market.
In addition, there is no “next China” to replace it. India will not become the next China. Finally there are “splinternet” opportunities, as the fracturing of the global internet into regions could allow investors to gain exposure to both the U.S. and Chinese internets.
WSR: How can advisors both navigate the problems with investing in China and still capitalize on the strengths of those investments?
Harburg: The key to investing in China is working with fund managers who have robust boots on the ground, can read the Chinese government “tea leaves,” mitigate geopolitical risks and be net beneficiaries of data arbitrage. Chinese government regulatory policy and statements of sectoral support are often high-touch and require a nuanced understanding of their true meaning in order to judge the economic implications.
WSR: China showed economic weakness in late 2023 and some have predicted economic instability or worse. What are your views on China’s economy in 2024 and beyond?
Harburg: China will get organized on stimulus and regulatory intervention. It’s the contrarian trade of the year, with sound fundamentals but a bad narrative. The negative news is priced in, and many stocks are due for a rebound. There is currently a consumer confidence crisis, and its resolution should unlock some of the country’s $6.1 trillion in household savings.
IPOs by Chinese companies such as Ant, Bytedance and Shein have sparked renewed interest in the Chinese markets. However, U.S.-China relations will likely take a step back in a U.S. presidential election year as each party tries to prove its sternness on China. Chinese growth will not be internet-driven, but there is opportunity in domestic travel and brands, as well as supply chains.
Janeesa Hollingshead, Contributing Editor at Wealth Solutions Report, can be reached at firstname.lastname@example.org.