Global investment firm GQG Partners has emerged as a top-performing emerging market stock fund. Its executives have made a decisive move to refrain from following the trend of investing in soaring Chinese stocks.
Rajiv Jain, an Indian-born billionaire, is the co-founder and chairman of asset management firm GQG Partners. Born and raised in northern India, Jain studied accounting at Punjab University, finance at Jamnalal Bajaj Institute of Management Studies, and then pursued an MBA at the University of Miami.
Currently, GQG manages assets worth $23 billion.
GQG’s performance this year has been particularly impressive, partly due to holding a lower allocation of Chinese stocks for the long term. Jain maintains the proportion of Chinese stock holdings at around half of the benchmark index – MSCI China Index – weight (about 12%).
The fund posted an average return of 14% in the first eight months, comfortably exceeding the 9.6% rise in the MSCI Emerging Markets Index.
However, as of October 2, with the collective surge in the Chinese stock market, GQG lagged behind the benchmark index by 3 percentage points. The exceptional business performance achieved by the fund this year was quickly eroded as the benchmark index soared over 30% in just 10 days.
Nevertheless, Jain remains steadfast in his initial decision and remains unruffled because he believes this rally is short-lived. His perspective sharply contrasts with that of many of his peers.
The recent frenzy in the Chinese stock market reminds Jain of the “reopening trade” at the end of 2022, when a buying frenzy similar to the current one followed the end of Beijing’s COVID-19 pandemic control measures. However, due to the disappointing economic recovery, that rebound failed within a few months.
Jain told Bloomberg, “We’ve seen this kind of excitement several times in the past three years,” only to see it all dissipate eventually. His fund outperformed 92% of peers tracked by Bloomberg over the same period.
He explained that although the stimulus measures implemented by Beijing, including interest rate cuts, help boost market sentiment and provide more liquidity to the stock market, the authorities need to address the struggling Chinese real estate market.
According to previous estimates by Bloomberg, at least 48 million housing units in China are still under construction. Analysts estimate that China will need up to 5 trillion yuan to acquire unsold homes from developers and convert them into affordable housing.
Jain pointed out that most Chinese people do not hold stocks, but many own houses or are directly affected by the real estate market. Therefore, stabilizing the real estate market should be a priority for the Chinese government. The real estate market is crucial for broader economic stability and public confidence in China.
He noted that the recent excessive rebound in the Chinese stock market has benefited consumer technology stocks, including prominent positions of Chinese tech stocks like Alibaba in the MSCI China Index. As investors rush in to cover short positions, the prices of these Chinese tech companies have risen.
In Jain’s observation, the growth trajectory of these Chinese internet consumer companies has dimmed. Although Alibaba was once the jewel of China’s new economy, its revenue growth has stagnated amidst intensified e-commerce competition.
Jain added that despite some signs of the Chinese government shifting its preference away from state-owned enterprises after cracking down on industries like finance and technology over the past three years, there are few indications of a notable shift towards private enterprises.
“In China, you have to follow the Communist Party’s instructions,” Jain said.
Due to ongoing concerns about a real estate crisis and tightening liquidity in China’s economy, the Chinese stock market has been struggling. Earlier this year, a market crash prompted many to turn to the Weibo accounts of the U.S. Embassy for help.
The mood among Chinese stock investors regarding the rebound is mixed, with both excitement after a long absence and fears of it evaporating just as quickly. After all, Chinese investors have suffered losses many times before.
One Weibo user hinted at a possible crash following the rebound in the stock market. “As a ‘vegetable’ investor in A-shares for more than 20 years,” he wrote, “the holiday atmosphere now feels familiar, just like ten years ago.”
Others pointed out that the lack of attractive investment options has fueled this fervor.
“There haven’t been many good investment choices since the real estate crash. So, when there’s not much else to invest in, people rush in, just like they do with bonds and stocks,” wrote a user.
“Think back to that time in 2015 with 5178, and closer to the recent lockdown in 2020, how those situations played out and what this time might look like. It probably won’t change much,” a seasoned mainland Chinese investor wrote on their social media.
Nomura Securities cautioned that the current rebound in the Chinese stock market is the largest since 2016 but may turn into a collapse, as China’s economic fundamentals are even weaker than before the pandemic.
Economists led by Ting Lu warned in a report to clients on Thursday that in the most pessimistic scenario, “a crash could follow the stock market fervor, similar to what happened in 2015.”
They cautioned that a bubble is brewing in the Chinese stock market, with the probability of a negative outcome far exceeding that of a positive one. The risk of China repeating the boom and bust of 2015 in the coming weeks is rapidly increasing.