Rajiv Jain not impressed by Chinese stock market madness BNN Bloomberg

(Bloomberg) — Investors around the world are rushing to buy Chinese stocks as Beijing's stimulus blitz sparks an epic rally. Don't count Rajiv Jain among them.

The manager of the top-performing $23 billion emerging markets equity fund GQG Partners has kept its holdings of Chinese stocks at about 12% of the fund, or half the weighting of its benchmark. As a result, the fund's outperformance this year was wiped out as the MSCI China index rose more than 30% in just 10 days.

Despite the rapid reversal of fortune, the stock picker remains firm and unfazed as he views the rally as fleeting. The latest surge reminds Jain of the so-called reopening of trade in late 2022, when a similar buying frenzy took place after China lifted Covid restrictions. This recovery ran out of steam in a few months because the economic recovery was disappointing.

How many times over the past three years have we seen those enthusiasms dissipate, said Jain, whose fund beat 92% of its peers tracked by Bloomberg over the same period.

The Jains' view contrasts with that of his peers. Clients of Goldman Sachs Group Inc.'s hedge funds made their largest weekly net purchases of Chinese stocks since its prime brokerage unit began tracking such data in 2016. On Tuesday, the KraneShares CSI China Internet Fund of $8 billion attracted $700 million, the largest inflow since the beginning of the year. the exchange-traded fund debuted in 2013.

Although current stimulus measures, including interest rate cuts, help boost confidence and provide more liquidity to the stock market, President Xi Jinping must tackle the country's ailing real estate market, said Jain.

At least 48 million homes sold in China before completion remain unfinished, according to Bloomberg Intelligence. Analysts estimate that China will need up to 5 trillion yuan ($712 billion) to buy back unsold homes from developers and convert them into affordable housing.

How do we make sure that the real estate situation stabilizes because most people don't really own stocks? Jain said.

Jain was on track for another stellar year, thanks in part to its long-standing underweight in Chinese stocks. His fund returned 14% in the first eight months, far outpacing the 9.6% gain of the MSCI Emerging Markets indices. But on Oct. 2, it was 3 percentage points behind the benchmark, as Chinese stocks soared.

If the party continues without us, it doesn't matter, he said.

According to Jain, the latest rebound has unduly benefited consumer technology stocks, such as Alibaba Group Holding Ltd., a favorite among hedge fund investors like David Tepper and Michael Burry because of their strong presence in the MSCI China index. . Those names soared as investors rushed to cover short positions or gain exposure to China.

But these consumer Internet companies aren't growing as fast as they used to, he said. Once the jewel of China's new economy, Alibaba's revenue growth is stagnating as competition in e-commerce intensifies.

It’s essentially a profession, Jain said. It's a nice job. But can we really invest in it for three years, five years?

Jain has built Florida-based GQG Partners into a $156 billion investment powerhouse since 2016. He rose to fame last year for investing in Adani Group companies after they were criticized by a short sale report. His investment in the Indian conglomerate surged, helping Jain's emerging markets fund deliver a 29% return in 2023, almost triple the gain of its benchmark index.

The Jains' preference for safer, high-quality stocks means that fund underperformance is virtually guaranteed when everything turns around. As of June, its largest holdings in China were mainly state-owned companies, including China Construction Bank, China Shenhua, PetroChina and Zijin Mining Group, according to the latest filings. He likes public companies because they pay high dividends and trade at a cheap price.

If China can revive the economy, cyclical stocks such as banks will likely benefit more from a recovery than those like Alibaba, Jain said. There are few signs that Xi is changing his preference for state-owned companies over the private sector, after cracking down on sectors from finance to technology over the past three years, he added. State-owned enterprises are favored by the Chinese Communist Party, which wants them to succeed.

In China, you do what the CCP tells you to do, Jain said.

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