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Five insights in five minutes

Five in Five: Archegos, real estate, China bonds, Deliveroo, EM
01 April 2021

    Archegos and China tech

    When asked why shares are tanking, you often hear the reply: ‘More sellers than buyers’. This can never be the case, of course, just as the forced sale of a handful of stocks by Archegos Capital last week must have been met with an equal amount of forced buying. The prices at which everyone agreed to trade, however, are a different matter. As can be seen in the chart below, a basket consisting of the names Archegos was supposedly torching (or rather, banks were on its behalf) has fallen almost 40 per cent since the recent highs. Half of the eight, including Baidu and Tencent Music Entertainment, are Chinese stocks popular in technology funds. Indeed, five China technology ETFs listed in America had more than a tenth of their portfolios in them. Nothing beats a spectacular fire sale when investing – either in companies or the funds that own them. Especially when nothing fundamental has changed.

    Themes: China equities, China technology

    Archegos and China tech 

    Listed real estate

    Global property stocks have underperformed wider equities since the outbreak of the pandemic. As can be seen below, the commonly-used FTSE EPRA Nareit Developed Index is down six per cent in the year to February in dollars, while shares have jumped by a quarter. You might have expected dividends per share of real estate equities to have similarly underperformed, as lockdown measures have meant many shops and leisure properties remain empty and millions of employees are working from home. In fact, real estate dividends per share have fallen by a smaller margin than equities generally. Can that be right? Either markets are implying greater falls in future dividends, or the decline in real estate stocks is an overreaction. Given advances in vaccine rollouts, continued policy support and forecast economic recoveries, a 3.8 per cent yield from listed property looks compelling versus MSCI ACWI on 200 basis points less.

    Themes: global listed real estate

    Listed real estate 

    Chinese bonds in the FTSE

    The last floodgate has been opened. Following in the wake of two main competitors with their major fixed income indices, FTSE Russell has confirmed this week that it will include Chinese government bonds (CGBs) in its widely-followed World Government Bond Index (WGBI). The estimated weight of CGBs in the index will be 5.25 per cent by the end of the inclusion process, which will span three years starting in November this year. With assets under management tracking the index estimated at around $2.5 trillion, the move roughly translates to $130 billion of additional foreign capital into CGBs over the course of three years, or approaching $4 billion per month. To give that some context, last year the monthly average foreign inflows into CGBs was $7 billion (see chart), so this FTSE WGBI inclusion will potentially mean a whopping 50 per cent of additional outside investment on a monthly basis. Get ready to ride the surge.

    Themes: China, bonds

    Chinese bonds in the FTSE 

    China food delivery

    Deliveroo’s public debut on Tuesday – market cap $8 billion after an initial sell-off – comes a year into our wild lockdown nights of sitting on the sofa, eating takeaways. With revenue nine times the UK’s and double that of America, however, China makes Deliveroo look like a joey when it comes to online food delivery. Boasting some 500 million customers, sales have grown 30-fold in the past decade, with 90 per cent of China’s market attributable to the top two leading platforms, Meituan and Ele.me. Despite in-restaurant dining in the fourth quarter of 2020, the purchase frequency of Meituan’s users reached a record high of more than six times per month, and growth was up a third on the prior year. The two companies’ food delivery operating profit margins last quarter benefited, rising year-on-year and sequentially to 4.1 per cent (most global peers don’t make a profit), while revenues grew 40 per cent versus 2019.

    Themes: China equities

    China food delivery 

    EM and South Korea

    When faced with uncertainty, most humans seek guidance from tea leaves, stars or tarot cards. An emerging market investor, however, knows to look deep in their Seoul. Having endured a testing run of late – emerging equities have trailed global stocks by four per cent over the past month – South Korea offers hope. Although the country has only a third of the weight of China, when the likes of Samsung, SK Hynix and Hyundai are in an up-trend versus the MSCI emerging markets index (as now) the latter tends to outperform developed equities. Conversely, as can be seen in the chart below, when the relative performance of Korean shares dipped below its 200 day moving average for any length of time over the past decade, the emerging benchmark trailed the MSCI World by five per cent on average. South Korea currently holding its own bodes well.

    Themes: emerging market equities

    EM and South Korea 


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