Investors hope for China turnaround

One thing to start: Happy new year and welcome back to FT Asset Management. I hope you had a great break. Here are Ruchir Sharma’s top 10 trends for 2024, which include forecasts that Europe’s economy will be more resilient than the US, the dollar will weaken and investors will demand a premium on long-term debt. And here are the business trends, people to watch and risks on the horizon in 2024.

Is the worst over for China’s stock market?

Could this be the year that investors fall back in love with China? Expectations at the beginning of 2023 were sky-high as the country eased its economically and socially punitive zero Covid restrictions. But the Chinese economy failed to roar back to life as the country’s real estate bubble burst and consumers held on to their cash.

The MSCI China index has fallen 60 per cent from its peak in early 2021, and the domestic CSI 300 is at its lowest level since early 2019. That stock market underperformance has prompted almost 90 per cent of foreign money funnelled into Chinese equities in 2023 to flow back out before the year’s end — a historic outflow from the world’s largest economy.

Now some asset managers, including Amundi and Federated Hermes, think the worst is over for the Chinese stock market. “We do not share the view many hold in the market that ‘China is largely uninvestable’, and we see a favourable risk-reward situation in China,” said Kunjal Gala, head of global emerging markets at Federated Hermes. His global emerging markets fund is overweight Chinese equities and particularly bullish on the electric vehicle battery production and chipmaking sectors.

Analysts said that most global investors were likely to remain wary of Chinese equities before the so-called Two Sessions in early March — an annual gathering in Beijing where Communist party leaders announce an economic growth target and set out policy priorities for the year ahead.

Others are looking at sectors that might benefit from government intervention, with a UBS Asset Management research note suggesting that the “historic underperformance” of Chinese state-owned enterprises might be in the middle of a reversal.

Other veteran China investors, such as JPMorgan’s chief China strategist Wendy Liu, warned against waiting for white smoke from government compounds in Beijing. While clients might prefer “something concrete” from Chinese policymakers to justify snapping up undervalued shares, from her own experience “the best buying opportunity is when there are no catalysts”.

Chart of the week

Record inflows into US money market funds in 2023 have triggered a multibillion-dollar fee bonanza for the asset management industry, which for years treated the product as a loss leader.

US money market fund providers — such as Fidelity, Vanguard and Charles Schwab — collectively earned $7.6bn in fees in 2023 as assets passed $6.3tn, according to government figures.

That was more than $1bn higher than in 2022 and a jump of about 35 per cent from 2021, before US interest rates began to rise, according to data from the Office of Financial Research, a government agency. 

“We’ve been hit by a wall of cash. It’s just too hard to ignore an asset class that is giving you 5.5 per cent, risk-free,” said Kim Hochfeld, global head of cash at State Street Global Advisors, where cash funds grew 34 per cent this year.

Much of the phenomenon is because of retail investors keen to capitalise on high yields and the perceived safety of government debt.

Money funds, which invest in very short-term securities and offer daily access, are dominated by a handful of very large players led by Fidelity, Vanguard, JPMorgan Chase and BlackRock.

The providers compete for cash with bank accounts and have benefited from more than a trillion dollars in inflows driven by rising interest rates and, earlier in the year, concern about instability among regional banks.

For the year as a whole, the total has eclipsed even 2020, when cash flooded into money funds during the early stages of the pandemic. 

Ten stories you may have missed over the break

Hedge fund numbers are starting to roll in for 2024. Sir Christopher Hohn’s activist hedge fund TCI rose 32.7 per cent, well ahead of equity markets. Meanwhile, Citadel and Millennium outpaced rivals such as Schonfeld Strategic Advisors and Balyasny Asset Management, illustrating how an arms race for talent and technology is taking a toll on smaller multi-manager players.

BlackRock’s push into alternative investments led it to hold talks with Warburg Pincus. None of the talks led to an agreement, but BlackRock is still conducting a wide-ranging search for an acquisition to bolster its profile in private funds.

Activist investor Cevian Capital has taken a €1.2bn stake in UBS, betting that the Swiss bank can double its valuation over the next three to five years. Cevian, Europe’s largest dedicated activist, is now a top-10 investor in the lender.

Big investors have spent much of 2023 trying to belatedly jump on a stock market rally that few saw coming, or nursing losses as the “year of the bond” fell flat. But the year has also offered some big wins for traders willing to dive into more esoteric markets. Here are our top niche trades, from uranium to Turkish bonds.

T Rowe Price chief executive Rob Sharps has said the worst is over for the asset manager after the heaviest year of outflows in its history, with more than $80bn expected to leave the platform by the end of this year. The active equity house has faced strong headwinds since early 2022.

Private UK investors were set to have withdrawn the highest amount in more than two decades from London-listed equities by the end of 2023, according to data from the Investment Association. And asset managers have launched the lowest number of funds for UK investors in two decades, according to Morningstar. Both trends illustrate how higher living costs and interest rates have prompted investors to move out of investment funds. 

UK asset manager Abrdn has slashed employee benefits as part of a fresh round of cost cuts, halving redundancy payouts and reducing the length of paid parental leave by about a third. It comes as the company has been battling to contain expenses and investor outflows. 

Asset managers are warning that proposals by the US Securities and Exchange Commission to tighten new liquidity requirements and pricing methods for US mutual funds will drive away investors, reduce choice and hasten the demise of an investment vehicle that underpins American retirement savings. 

UK pension fund the Universities Superannuation Scheme, one of the biggest investors in Thames Water, has slashed the value of its stake by almost two-thirds. The move intensifies doubts over the financial health of the UK’s largest water distributor. 

Partners at billionaire Michael Platt’s investment firm BlueCrest Capital are liable for income tax on a pay scheme dating back to 2008 after the firm largely lost a legal battle at the Court of Appeal. A plan by the UK-headquartered group to retain staff through so-called special capital should attract income tax rather than the lower-rate corporation tax as the firm intended, the court in London has ruled.

And finally

Kick off dry martini January in style with my colleague Robert Armstrong’s guide to the best martinis in Manhattan. My personal favourite is Bemelmans Bar at The Carlyle. Ludwig Bemelmans’ uproariously funny memoir, Hotel Splendide, in which he uncovers the fabulous world of New York’s Ritz-Carlton Hotel, is an entertaining read. Meanwhile, if you’re in London, here’s my ode to the martini from a few years ago. I’m with American poet Dorothy Parker, or the lines sometimes attributed to her: “I like to have a martini/ Two at the very most/ After three I’m under the table/ After four I’m under my host.”