The Hidden Dragon

Investing in China remains challenging but that doesn’t mean there aren’t opportunities. Portfolio manager Vivek Tanneeru and Head of Portfolio Strategy David Dali highlight one approach that potentially can deliver alpha generation today while positioning for a potential upturn tomorrow.

Key Takeaways:

  • There aren’t many clear signals that China’s fortunes are about to change markedly for the better anytime soon. Yet avoiding China altogether may create an active investment risk in our view by limiting exposure to a potential long-term growth market, particularly if developed markets encounter increasing headwinds.
  • One way to access China while potentially limiting exposure to its economic and external challenges is by investing in lower profile, innovative companies that are less in the crosshairs of the Chinese regulators or geopolitics.
  • Investing in stocks a step removed from mainstream investment benchmarks isn’t the only approach to navigating China but we believe it’s one that has the potential to deliver near-term performance while enabling investors to bed in for a possible upturn in China’s economy and markets.

China hasn’t been working for investors. Its equity markets are in negative territory this year having posted double-digit declines over the past three years. And while U.S. has been the star performer in recent years, other emerging markets have also done better than China, significantly in the case of India and Mexico. And there aren’t many clear signals that China’s fortunes are poised to significantly turnaround in the near term.

It presents a dilemma for investors. Should China be avoided altogether or is there a way to overcome these challenges and access good performance while gaining exposure in additional geographies which could prove valuable if the other key global markets, particularly the U.S., slow or take a downturn.