April 27, 2018 / 6:33 AM / in 7 months

China funds cut equity exposure to 19-month low, boost bonds

SHANGHAI (Reuters) - Chinese fund managers cut their suggested equity exposure for the next three months to a 19-month low, on worries over China’s economy amid trade war fears.

A China yuan note is seen in this illustration photo May 31, 2017. REUTERS/Thomas White/Illustration

They cut their suggested equity allocations to 69.4 percent from 70 percent a month earlier, according to a poll of eight China-based fund managers conducted this week.       

The fund managers have boosted their suggested bond allocations for the coming three months to 13.1 percent from 8.8 percent.

They have lowered recommended cash allocations to 17.5 percent from 21.3 percent in the previous month.

Market uneasiness over trade protectionism and a deepening rift between the world’s two largest economies has led to a rebalancing of managers’ portfolios. 

“The ZTE ban added to worries over China-U.S. trade spat,” a South China-based fund manager said.

The United States has banned American firms from selling parts and software to China’s ZTE Corp (0763.HK) for seven years, potentially devastating for the telecoms equipment maker and exacerbating tensions between the world’s two largest economies.

The fund manager added that even with the recent fine-tuning in China’s policies and pick-up in some macroeconomic data, concerns about downward pressure for economic growth in 2018 have not lessened.

Against an increasingly complex global economic and political backdrop, Beijing has vowed to reach this year’s economic targets, including deepening supply-side reform, further lowering corporate financing costs and stepping up efforts to make breakthroughs in key technologies to support emerging industries.

A faltering in exports could push authorities to shift policy from a slight tightening bias to a looser stance, or even a return to their old playbook of growth-boosting measures, economists say.

China’s central bank last week unexpectedly said it will reduce the cash banks hold as reserves, a move that frees up lending for small firms but falls short of broad monetary easing, with the authority attaching requirements on how funds must be used.

Despite the suggested equity exposure cut, some fund managers believe valuations for blue-chips have bottomed out.

One fund manager saw accelerating foreign fund inflows into the Chinese stock market in the next three months ahead of MSCI’s China inclusion on June 1, recommending growth stocks with low valuations and blue-chip firms.

Overall, the fund managers surveyed held mixed views on asset allocations for the next month, with four favoring an increase, one suggesting a cut, while three recommended the same level of equity exposure.

According to the poll, average recommended allocations for consumer stocks in the next three months climbed to 31.3 percent from 29.6 percent last month, while those for electronic firms were lowered to 13.9 percent from 16.3 percent the previous month, indicating fund managers’ defensive stance for the moment.

Reporting by David Lin, Luoyan Liu and John Ruwitch; Editing by Jacqueline Wong

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