Scottish Mortgage and other Asia funds tumble as local regulatory crackdown widens

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Further falls for some major Chinese tech stocks on the back of a local regulatory crackdown have put another dent in some major London-listed funds, notably including the popular Scottish Mortgage Investment Trust PLC (LSE:SMT).


Meituan shares tumbled an added 18% today in Hong Kong, taking their decline for the week to 25%, after a group of regulators introduced tighter reforms for digital food delivery platforms.


Fast-growing Meituan and Alibaba’s Ele.me arm are among the tech platforms that have been condemned on social media for the way delivery drivers are treated.


This followed a new clampdown on digital media giant Tencent Holdings Ltd and the online education sector earlier in the week, which sent shockwaves out to the many funds invested in Chinese tech.


Shares in FTSE 100-listed Scottish Mortgage, where Tencent and Meituan make up four of its top 10 largest positions, were down 1.7%.


Fidelity China Special Situations PLC (LSE:FCSS), where Tencent was the largest position but has no stake in Meituan, slipped 4.5%.


Baillie Gifford China Growth Trust PLC, where Tencent and Meituan are first and third-largest holdings, shares fell 6.6% and JPMorgan China Growth & Income PLC, where the pair are the largest and fourth-largest in the list, shares dropped 9%.


The Invesco (NYSE:IVZ) Asia Trust plc and Abrdn’s Asia Dragon Trust PLC, which focus across the Asia Pacific sector but have China as their biggest country allocation, with Tencent the largest and third-largest holdings respectively, were down 2.6% and 1.6% respectively.


Many investors new to investing in China are likely to be concerned.


With many investors trying to unpick what’s going on in Beijing, Marc Ostwald, chief economist and global strategist at ADM Investor Services International, said: “One thing is now very clear and that is this is a row back to Maoist ‘command and control’, even if its economy is totally transformed relative to the Mao era.


“Perhaps the strongest signal lies in how the focus has been on reining in and taking more control over those companies with no obvious ties to the government, such as Alibaba, Didi and Tencent, while other tech behemoths for example Huawei and ZTE are left untouched.


“In the longer run, it is a major headwind to both the Chinese economy and to innovation in the tech sector, which will also heighten tensions with western advanced economies and their allies, embedding a ‘cold war’ like mentality.


“The challenge for the western advanced economies is large, above all in terms of building up an alternative production and supply chain infrastructure, which will take many years even with all the advanced technology, and with likely substantial implications for costs, margins and profitability.”


Dale Nicholls, manager of the Fidelity China Special Situations investment trust (FCSS), suggested China was just catching up with the West in terms of regulation.


“Companies have to rein in their exploitation of data … and all countries are going to be thinking about data differently,” he told Morningstar, adding that it was to be welcomed from an ESG perspective.


And Ronald Chan, founder of Hong Kong asset management firm Chartwell Capital and a listing committee member on the Hong Kong Stock Exchange panel, said he did not reckon investing in China is any riskier than before.


“Political risk has always been an overhang, and there are no surprises that central government wanted to reign in cannibalizing, monopolistic market tendencies,” he said.


“Applying a Western mindset to interpreting Chinese policymaking is too binary, and accepting the cultural and ideological differences is part of the investment thesis. Remember that markets are fickle and have a short term memory; investors have had a phenomenal run over recent years, so investors late to the party have only themselves to blame.


“Investing in China is two steps forward, one step back. If investors are going to dance with China to capture the development and growth of the country, they need to expect to get their toes stood on occasionally.”


For investors wondering where to go from here, Chen advised avoiding the “eye of the storm”, which seems to be the big names that have heavy trading volume and are big components of the major indices and ETF.


“We think that the Asian post-pandemic recovery story is a much safer and more rewarding position to take. Domestic consumption such as food and restaurant and retail spending are themes that regional governments and business owners are all aligned with.


“We like the quality small to mid-cap companies where we can grasp what exactly is going on in their business, and see the catalysts for recovery and growth. Localised themes are also important, such as the broad spectrum of businesses that will benefit from borders re-opening.


“Finally, make sure your portfolio is bullet-proof by having an all-weathered strategy. We like to blend income stocks and quality growth companies that typically move differently and give the portfolio some insulation from volatility and generate more asymmetric returns than a pure beta play.”

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