What should investors in China and Taiwan funds do now?

After diversifying to the US markets, Indian investors had sometime back taken a fancy to the Greater China region, comprising China, Hong Kong and Taiwan. However, Indian funds focused on this region have found the returns quite underwhelming over the past year.

There are three Indian equity schemes that focus on the Greater China region. Axis Greater China Equity was launched in February 2021; it is down 22% on a yearly basis. Nippon India Taiwan Equity Fund, launched in December 2021, has fared even worse. It is down 30% since its inception. Edelweiss Greater China Equity, launched in 2009, is down 28%. Of the three, Axis Mutual Fund’s scheme is closed for fresh investments because of regulatory limitations on overseas investments.

“There are two reasons behind the fall in returns. Over the last year or so, several regulatory steps were taken by the Chinese government specifically pertaining to new-age businesses. Regulatory regime has been tightened not just in China but across the world as well. The only difference is that the steps taken in China were drastic, and it happened when most of these companies were doing well and the valuations were very high,“ said Niranjan Avasthi, head- product, marketing and digital business, Edelweiss Mutual Fund.

“Further, in the last couple of months, China implemented strict lockdowns in many parts of the country after a rapid increase in covid-19 cases. Because of this, economic activity there suffered, adding to the negative sentiment, especially in the equity markets,” he added.

 

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On Taiwan specifically, Nippon India Mutual Fund has in a note said that the foreign outflow from Taiwanese equities is intensifying due to several reasons, including an aggressive monetary policy tightening in the US, lockdowns in China impacting regional businesses, and a weaker local dollar.

On chances of these funds witnessing more pain, Rushabh Desai, founder of Rupee With Rushabh Investment Services, said, “The answer is ‘yes’. The reason is because we have seen the government policies changing , along with the regulatory issues. The entire property segment is deteriorating and witnessing defaults. Also, the banking system is facing issues. The economy is deteriorating. And, now, we may see a geopolitical crisis, which doesn’t augur well for the markets.”

However, experts are bullish on the long-term prospects of the region.

“Rarely do these kinds of markets trade cheap. China is trading at 11-12 P/E ratio on one-year forward basis. It is the only economy which is probably going through a rate cut cycle rather than rate hike cycle. Given this context, on a relative basis, China is very well placed from a long-term investment perspective”, said Avasthi.

Meanwhile, on Taiwan, Nippon India’s note said that with the recent price correction, the forward 12-month PE ratio of TAIEX has come down to 9.9, way below the 5-year and 10-year average.

The fund house believes that though some uncertainty still exists, it is already reflected in the stock prices and the valuations can potentially bottom out as global inflation is anticipated to trend lower over the next couple of quarters.

Desai suggests, “If someone wants to invest in the Greater China region, then lump sum can be invested because the valuations are dirt cheap. However, this investment has to be in the satellite portfolio because we don’t know when exactly the bounce-back will happen.”

He further advises that investors should look at a horizon of 6-7 years when venturing in this region.

However, experts do have a word of caution. “Greater China region is a good spot but only for those who understand the political , economic and regulatory risks. Right from Taiwan to China, some exposure can be taken, but it should be more of a tactical call for savvy investors rather than for everybody,” said Prableen Bajpai, founder of FinFix Research & Analytics.

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