Chinese stocks pose reputational risk to US, Canadian pension funds amid geopolitical tensions, says Alpine Macro strategist

News Canada, China, Investment, Pension Management

Chinese stocks are becoming a reputational hazard for US and Canadian pension funds because of geopolitical risks, a strategist said.

Money managers are having a hard time convincing their boards to invest in Chinese assets even if they see long-term potential, as they worry about being seen to be aligning with a hostile government, according to Alpine Macro, a Montreal-based research firm.

As a result, they are reducing their exposure to the country and use any market rallies as an opportunity to sell, it said.

“This kind of selling is not motivated by economic and financial considerations, but by political and geopolitical factors,” said Yan Wang, chief strategist for emerging markets and China, in a podcast presentation to clients. “We can argue that this selling doesn’t really make economic sense, but the market will just face this kind of continuous headwind until the selling pressure is exhausted.”

The underwhelming market performance, a struggling economy and rising geopolitical tensions have prompted some of the biggest pension funds in the world to wind down their China investments.

The MSCI China Index, which tracks over 700 Chinese companies listed at home and abroad, has tumbled 9.5 per cent so far this year to trade near an 11-month low, wiping out market capitalisation of US$100 billion along the way.

Earlier this month Canada’s biggest pension fund, CPP Investments, trimmed staff in its Hong Kong office and paused new investments in China, according to Reuters. Norway’s NBIM, the world’s largest sovereign wealth fund, said it plans to close its office in Shanghai and shift its regional base to Singapore.

“Geopolitical uncertainty remained a risk,” CPP said in its latest annual report. “US-China and Canada-China relations remain tense, and uncertainty surrounding China’s regulatory and policy environment could negatively impact our investment.”

The firm said it will regularly reevaluate its approach to emerging markets amid the rapidly changing geopolitical landscape, specifically the evolving relationships between Canada, the US and China.

“Stay underweight Chinese assets over the long run,” Matt Gertken, chief geopolitical strategist at BCA Research, said in a note last week. Any short-term bounce will be followed by disappointment, he added.

Still, the downside for Chinese stocks could be limited as investors have already priced in most of the bad news, Alpine’s Wang said.

For the market to really stage a strong rally, policy support needs to become a lot more aggressive and the growth outlook needs to show clear signs of improvement.

“But both of these two conditions are unlikely in our view, at least at this moment,” said Wang. “Looking forward, we expect Chinese stocks to be stuck in this trading range.”

Chinese stocks pose reputational risk to US, Canadian pension funds amid geopolitical tensions, says Alpine Macro strategist

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