Chinese equities will outperform global peers in the first half of this year, according to Carrhae Capital LLP, which is betting on the nation’s reopening after its emerging-market hedge fund beat peers last year.
(Bloomberg) — Chinese equities will outperform global peers in the first half of this year, according to Carrhae Capital LLP, which is betting on the nation’s reopening after its emerging-market hedge fund beat peers last year.
“We have entered the year with a very bullish stance on China and on the margin we have been taking profits,” Ali Akay, Carrhae Capital’s London-based chief investment officer, said in emailed comments. “However, we still see plenty of upside even in the go-to stocks in China and plenty more in the more neglected corners of the market.”
With $322 million in assets under management, Carrhae Capital’s long-short strategy returned 15.3% last year, after fees, according to the firm. In comparison, emerging-market long-short equity hedge funds overall lost about 7% in the same period, according to Singapore-based data provider Eurekahedge Pte. The strategy typically sees managers buy stocks they expect to gain, hedged with sales of borrowed shares that they plan to buy back later at a cheaper price.
The fund generated returns in 2022 from long and short investments in consumer and e-commerce companies in China, information technology companies in Asia, financials across the region, and energy and materials companies operating across global emerging markets, said Akay. It also had investments in Turkey and the Middle-East, he said.
According to the company, it recently added to its holding in Taiwan Semiconductor Manufacturing Co., and made new investments in India’s HDFC Bank Ltd., Thai convenience store operator CP All Pcl as well as rail network firm Rumo SA in Brazil.
The firm, which oversees about $760 million in total, also undertakes a long-only strategy which declined 15.1% last year, but still outperformed MSCI Inc’s gauge of developing-nation stocks, which slumped more than 22%.
This year has seen global investors snap up Chinese stocks, including blue chips from large consumer staples to financial firms, as the nation’s equities rally on optimism over a reopening from Covid curbs. A swift dismantling of restrictions and supportive steps for its tech and property sectors have boosted China’s economic outlook.
A solid pipeline of initial public offerings by Chinese companies provide “an abundance of investment opportunities,” Akay said. The firm is also targeting “some bargains in structural growth stories” in Indian stocks should funds “migrate out of” the country to chase China’s re-opening trade. Stocks exposed to capital expenditure in the energy sector as well as structural reforms in Argentina and Saudi Arabia are also in focus, he said.
Vulnerable Luxury
Carrhae Capital is currently wagering against shares of companies in industries that it sees as not fully pricing in the prospects of lower growth and lower discretionary spending among corporates and consumers, Akay said. While the retail sector has largely repriced, sectors such as luxury, high-end automobiles and IT services are still vulnerable, he said.
Sustained rallies in emerging markets tend to occur when their economic growth exceeds that in developed markets, especially the US, “by a healthy margin,” Akay said. Economists surveyed by Bloomberg project emerging markets to grow by an average 3.9% in 2023 compared to 0.5% for developed economies.
“I currently see a lot of tailwinds behind the rally in EM but as we have seen in the past, geopolitics can create challenges and the macro environment can sour quickly,” Akay said. “The biggest unpriced risks that I see are mostly concentrated in the previous safe havens such as US assets in general, private equity etc. — not in emerging markets.”
(Adds recent investments in fifth paragraph)
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