Five reasons why I haven’t sold:

Work

This one will likely be irrelevant to everyone except me.

Fortunately or unfortunately, I have lost several of my team to the great resignation. This also means it has been difficult to recruit, meaning my work life balance has been out the window. 80-90 hour weeks when you are working for the man is not a good place to be.

The result is I’ve had zero time to look at the portfolio, and fortunately I guess, it means I have made no irrational sell decisions.

Economic Cycle

The US Fed is tightening monetary policy, concerned about inflation. It has carried out multiple interest rate hike moves and pricing in many more, at least up to 2023. The Fed is also tapering its balance sheet, ending its bond buying program. Higher interest rates will likely lead to reduced investment and lower economic growth stateside.

Conversely, China is at the other end of the economic cycle, stimulating the economy via both fiscal and monetary policy actions. The Chinese central bank, PBOC have not only enacted rate cuts, but it has also carried out lending programs and liquidity injections, unleashing nearly 3T RMB into the system.

The Chinese government also announced 33T RMB in general budget expenditure, loan support via special bonds, and tax and fee cuts for small businesses.

On top of the stimulus mentioned above, Chinese authorities have changed their tune, potentially marking the end of a regulatory crackdown that started with the tech sector in November 2020 when Ant Financial IPO was postponed indefinitely.

Chinese Vice-Premier Liu He has since spoken, making comments such as the government supporting the development of the tech sector and public listings for technology companies.

The Chinese government has also acknowledged that for China to attain its 2022 GDP growth target of 5.5%, the technology sector will have a crucial part to play. Senior management of various companies has also shown optimism about the Chinese economy in 2H22 as the effect of policy actions in 1H22 take effect.

As well as tech, China had a credit crisis in the property sector, with several large developers including Evergrande and Shimao defaulting. After months of silence, Vice Premier Liu He has also since pledged to shore up the real estate sector with measures such as lower interest rates and market friendly policies such as providing loans to encourage merger and acquisitions for developers to acquire distressed assets.

Market Cycle

China has been in a downtrend since February 2021, and many Chinese stocks now have attractive valuations with a potentially positive growth outlook.

It’s worth noting on this point, I am not attempting to pick the bottom, and, China will do what is right for China.

Leaders

Biden and Albo – while the US and Australia are not China’s only trading partners, the change from the previously combative position holders to the new President and Prime Minister could be positive for all three countries.

Reopening

China’s borders and the end of COVID-zero policy coming soon? This is a come once and gone many times call.

There were reports last year of international company manufacturer plants in China operating at zero output. China has narrowed its mass testing scope where cases are detected, reduced its quarantine period for inbound travellers and even allowed key manufacturing sectors to operate in bubbles, to balance between its COVID-zero policy and keeping the economy moving.

Let me start with...I was wrong. And then say, I took a BIG parcel of this ETF at the time of my last straw some 4 months ago so you will know I am staring at a significant hole.

I am sticking to my guns and not selling even on the back of continually declining market conditions.

The World Bank has lowered its growth forecasts for East Asia to 5% from 5.4% forecast in October, and magically predicted growth could slow to 4% if conditions weaken further, surprising nobody.

The latest outlook reflects a hit following Putin throwing his toys out of the cot, US interest rates on the up and growth slowing in China on the back of Xi controls. Supply chain shocks are not helping impacting either.

Just typing that makes me think I should sell out...but again no. I still think the underlying businesses contained have the ability to deliver decent returns (not in the short but) in the medium term.

The aim of this ETF is “Asian tech tigers” ex Japan. I have written a straw about this before, however, I have been thinking more about Asia recently despite the fact I have not been there in more than 2 years. 

Before 2019 I would have been in Asia at least every second month, sometimes more regularly. Indeed, I had a role with a remit that covered APAC and so it was both an investing and business interest. 

I’ve re-read my previous straw, with one exception. I now think this is a good entry point. 

Don’t get me wrong there are still risks. China is facing headwinds with debt, and with a weighting of ¼ in Taiwan this one is going to see significant downside if tensions there escalate. 

The top 10 holdings are all companies that I would hold if I were not in this ETF - with three already separately held.*

The ETF also holds two of the big Indian IT outsource organisations – Wipro and Infosys. These two companies will continue to be powerhouse of Indian IT services for many years to come. 

One of the other reasons I am becoming more bullish here is the pent-up demand. There remains a global shortage of semiconductors which is having flow on implications for many downstream industries. 

While there may be more regulation coming in China, the shots over the bow from the party have now prepared the local market at least. The Chinese businesses will be prepared if additional regulation comes. 

Xi may want to further regulate elements of online services which have exploded in lockdown. This may further divide the internet for 1.5B people. There are already two internets, and I can see this increasing for the benefit of Chinese businesses that support this. 

*I would NEVER invest in an ETF without looking under the covers. While I appreciate the holdings can change I have looked at some with the immediate reaction of "gawd no". 

This ETF is comprised of tech shares aiming to track the performance of the Technology and Internet Tigers Index (Solactive Asia ex-Japan)

When I last looked in August, the top holdings were Tencent and Alibaba, followed by Taiwan Semiconductor. The Chinese holdings, Tencent and Alibaba have slid to third and fourth place respectively, behind Taiwan Semiconductor and Samsung now in the top two slots. While I haven’t confirmed, I suspect this is not related to weighting changes, rather it has been the decline in the two Chinese companies.

The ETF ran hard following 2020 declines but has seen a slide this year in line with the Chinese market. President Xi Jinping recent actions have rattled investors.

The government changes have been well documented - the list includes regulations on delivery services, crackdown on education to make these companies not for profit, and technology companies with more than 1 million users jump through security reviews before offshore listings are approved. All up, this is China driving towards common prosperity.

A legacy of ideology and political culture influences Chinese decisions where history is deeply entrenched. Common prosperity is a political campaign to secure Xi Jinping future at the 20th Party Congress next year by reassertion of the power of the Communist Party of China. We have already seen this in the empowerment of the Party within state-owned enterprises and private firms as touched on above.

China’s private sector provides over half the tax revenue, more than 60% percent of GDP, and almost three quarters of all technology innovation. Private sectors also contribute most of the urban employment and listed companies. The rise of the market has delivered a similar outcome to other nations, a growing income and wealth gap, with the wealthiest owning over 30% of the country’s wealth.

China now also has a middle class 15x the population of Australia which will number half a billion in less than 5 years. There are more than half a billion still living in poverty combined with a growing problem of weakening demand as the population rapidly ages. There is a need now more than ever a need to increase the size of the pie and slice it more fairly, which is exactly where the market comes in.

Xi Jinping is likely to cause further distress as things are changed through regulation of markets, as well as existing monopolies and state-owned enterprises. There will likely be significant changes to both tax and income transfer, both places where China currently lags, while maintaining, and reinforcing the culture of social responsibility.

It’s always easy on a whiteboard. This may be much more difficult in execution.

While this may seem to be far removed from the Asia ETF, my view is the current challenges in the Chinese market are more likely to be temporary rather than structural. The ETF also is not exclusively China focused either. Does this mean it is a good entry point?