As the Winter Olympics continues in China, Iboss’ managing director Chris Metcalfe has warned of the risks of the country’s ongoing covid zero strategy.
While the rest of the world is learning, slowly and with some difficulty, to live with covid, in China, authorities are continuing to double-down in trying to stamp out the disease whenever it appears, and at any cost.
The problem for Metcalfe is that China has yet to experience large numbers of Omicron cases, so when the variant arrives, he argues that something will have to give.
“Reports that vaccines made by domestic firm Sinovac Biotech Ltd offer limited protection against Omicron will likely reinforce China’s resolve to stick with its covid zero approach,” he said.
“However, we think this is a significant economic risk and the results could be more severe than last time with the Delta variant.”
Serious global problem
With the delta variant, Metcalfe noted the Chinese authorities were able to keep things under control because the virus was not as transmissible compared to the hyper-transmissible omicron.
“So, while the onset of omicron may not result in many deaths, it could play havoc with the Chinese economy,” he warned.
Given that China is such a huge part of the global supply chain, Metcalfe said this is not just a worry for China and emerging markets, it is potentially a serious global problem.
“You either let omicron spread, or the supply chain collapses or at best comes under unprecedented pressure,” he added.
“As investors, if you think these supply chain problems will become an even bigger issue, the areas you want to be overweight in are assets such as commodities and value plays and underweight those areas which are expensive relative to history.”
Exposure
So what of Iboss’s China exposure? Whilst it would be easy to be negative on China for all the macro reasons, Metcalfe noted there was a huge difference in between Chinese equity and North America equity performance in 2021.
Indeed, by just being invested in the US and staying clear of China an investor would have gendered close to 50% of returns. So, Metcalfe said there are not just macro factors weighing on China, there is now a huge valuation difference to consider.
“At the same time, given last year’s regulatory crackdown which we saw, some of China’s smaller company’s also look quite attractive,” he added.
“So, it is not quite as black and white as us saying China is going to face lots of problems in 2022 because, while it will, it has already had a year of phenomenal problems. It all depends just how much these new problems will affect valuations.”
To reflect its cautiousness, Iboss has just added the JPM Global Macro Fund into the model portfolios.
“There is a real risk of investors becoming blind-sided about conversations regarding inflation, but things such as what is happening in China could pose a problem,” he said. “This fund is relative to equities and given the fundamental backdrop looks like it is changing, it is good hedge for the model portfolios.”
