China stocks favoured by UBS, Goldman can wait as US$3.9 trillion mutual fund industry struggles to attract new investors

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onshore stocks, a “falling knife”

China’s onshore stocks are among the favourite picks of strategists at Goldman Sachs and UBS, while money managers from BlackRock to T. Rowe Price added to their approvals. Yet, local investors are not rushing into them.

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The mutual fund industry raked in 21 billion yuan (US$3.3 billion) of sales in stock-focused products in the first two weeks of 2022, according to data compiled by the Post. At this pace, sales in January would represent the slowest start to a year since at least 2018. About 450 billion yuan of newly launched funds were sold in January last year, a record.

The limp mirrors a lack of conviction in the market as key stock barometers in Shanghai and Shenzhen slumped as popular bets like electric-car battery maker Contemporary Amperex crashed. Losses incurred by star fund managers unnerved investors while new Covid-19 lockdowns weighed on the nation’s economic outlook.

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“Given the market performance, mutual funds are expected to face more pressure in sales this year,” said Xue Jun, an analyst at Orient Securities in Shanghai. Thus, bad-performing stocks that make up the funds’ biggest holdings may become a burden in their sales pitches, he added.

onshore stocks, a “falling knife”

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Shares of popular bets like electric-car battery maker Contemporary Amperex Technology have slumped recently. Photo: VCG via Getty Images

Goldman strategists favoured yuan-denominated stocks for their 13 per cent upside in 2022, counting on policy easing, political transition and moderating regulatory risks. UBS has an overweight call on the market. BlackRock turned tactically positive last quarter, while T. Rowe Price said the market is under-owned by investors.

Despite the weak start this year, mutual fund sales have been solid in the recent past. Households seeking higher returns than bank deposits have shifted their savings into the 25 trillion yuan fund industry, pushing subscriptions in equity-focused funds to 3 trillion yuan in each of the past two years.

The flow of cash has minted some high profile mega funds, drove onshore stocks to a 14-year high in February last year, and turned money managers like Zhang Kun of E Fund Management into celebrities. Zhang, who manages US$16.8 billion, stumbled in 2021 with losses in all his four equity-focused funds.

Some 53 per cent of the fund holders incurred losses last year, while only 11 per cent made money, according to data published by the Securities Times, a state-run financial daily. In contrast, stock funds earned 48 per cent returns on average in 2020, with 89 of them doubling their values.

onshore stocks, a “falling knife”

People walk past a large screen showing stock exchange data in Shanghai. China’s mutual fund industry raked in US$3.3 billion of sales of stock-focused products in the first two weeks of 2022. Photo: EPA-EFE

Analysts at French investment bank Natixis said Chinese stocks traded in Hong Kong remained a “falling knife” unless the regulatory fog clears up. Investors have been busy “rewriting the growth story of different sectors under the new regulatory normal, but the process is still on the way,” they added.

While many have started to look at regulatory risks more favourably, investors will be facing stiffer challenges this year. Cracks in the credit market have widened as more mainland developers come under a liquidity crunch, falling victim to China’s “three red lines” policy to contain excessive leverage.

For Liu Yun, an analyst at Chasing Securities, investors will need to be selective when buying into mutual fund products this year because of potential volatility in the market and funds’ values, saying “you need to be very careful about the retracement, positions and timing.”

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