During the summer months of 2021, the market for Chinese equities was anything but sunny. On the contrary, securities from the Middle Kingdom were caught in a veritable stock market storm. As recently as February, the MSCI China Index - the benchmark with 730 components covering around 85% of the emerging market's equity universe - had climbed to an all-time high. From that top, the index fell by as much as nearly a third. It is difficult to justify the correction on the grounds of an economic slowdown or growing inflation concerns. While the economy in the Middle Kingdom is expanding solidly, price pressure has not been able to slow down either other emerging markets or the Western stock markets. On the contrary, many Chinese equities are facing enormous political headwinds.
Beijing already threw a spanner in Alibaba's works last autumn. The internet giant had to cancel the USD 37 bn IPO of its fintech division Ant Group at the last minute. At the same time, the banking regulator introduced stricter rules for online lending. What initially looked like a targeted blow to Alibaba founder and multi-billionaire Jack Ma has in retrospect turned out to be the prelude to a veritable regulatory offensive. Online retail, again with Alibaba, has felt Beijing's heavy hand in recent weeks and months, as have the gaming industry, driving services, the real estate sector and private educational institutions. In July, the government ordered that companies offering tutoring in core subjects would no longer be allowed to make profits in the future. This step, justified by the financial relief for families, caused the share prices of the companies concerned to plummet by up to 70%.
The Swissquote China's Dragons Index has turned out to be quite storm-proof. The benchmark, which can be invested in via an actively managed certificate (AMC), is treading water in the short term. However, the consolidation is playing out just below the record high reached at virtually the same time as the overall market. Since February 2019, Swissquote's equity strategists have been keeping a targeted eye out for the "Chinese dragons". One idea generator for this thematic investment was the special conditions in the Middle Kingdom. On the one hand, this market is still uncharted territory for many investors, according to the initiators. At the same time - unlike Wall Street, for example - there is a particularly high degree of regulation. "Without knowing the lay of the land, investing can be a minefield," explained those responsible at the launch of the benchmark. While they have since been vindicated by reality here, little has changed in the fundamental calculus of the index. "Backed by the expertise of in-house experts, it focuses on China's structural transformation and invests in a balanced way in the industries in focus," explain the officials. In doing so, they aim to transform the country away from mass manufacturing to an independent technology-intensive powerhouse.
19 companies are currently included in the Swissquote China's Dragons Index. They include consumer stocks as well as technology, industrial, commodity and healthcare stocks. The top performer comes from the latter sector. Wuxi Biologics has risen nearly 300% since inclusion, adding 9.65 percentage points to index performance. The Hong Kong-listed company describes itself as the "world's leading open access biologics technology platform." In addition to this relatively exotic stock, the index includes numerous prominent large caps from the Middle Kingdom. Examples include automakers BYD, Geely and Nio, tech giant Lenovo and internet holding company Tencent. It has directly felt Beijing's recent repressive measures and therefore appears among the "Worst Performers". Recently, however, the Tencent share has been able to make up ground. With the Tracker Certificate on the Swissquote China's Dragons Index, investors can make a diversified bet that the situation in the Far East will generally calm down and that fundamental factors will once again come to the fore. As negative and annoying as Beijing's market interventions may be for investors: As they are unlikely to stall the structural transformation and long-term rise of the most important emerging market, the Far East could offer a favorable entry point.
Management Fee: 0.70% p.a.
Index Sponsor: Swissquote Bank SA
Issuer: Leonteq Securities AG
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