A top-performing Chinese macro hedge fund is warning that any pickup in the nation’s consumer spending will be mild, casting doubt on a key theme many investors expect will fuel a stock market rally this year.
(Bloomberg) — A top-performing Chinese macro hedge fund is warning that any pickup in the nation’s consumer spending will be mild, casting doubt on a key theme many investors expect will fuel a stock market rally this year.
Expecting a strong recovery in China’s consumption after the dismantling of its Covid curbs based on what happened overseas is “problematic,” Shanghai Banxia Investment Management Center, which manages more than 10 billion yuan ($1.5 billion), said in its December investor letter.
The CSI 300 Consumer Discretionary Index has surged 23% since Oct. 31, outpacing the broader equity rally as traders pin high hopes on consumers to supercharge growth after three years of lockdowns. For Banxia, that recovery in consumption will be “very mild” due to high household debt levels and a slumping property market that’s curbed confidence amid a slowdown in income growth.
“Consumption stocks are very likely to subsequently face a reality that falls short of expectations along with a stagnation and correction in share prices,” the firm, led by founder Li Bei, wrote in the letter dated Jan. 8, according to a copy obtained by Bloomberg.
The Banxia Macro Fund gained 1.3% last year, extending total returns since inception at end of 2017 to 240%, according to the letter. Li declined to comment.
An annualized 33% return for the past five years ranks Banxia the best performer among multi-asset funds running at least 10 billion yuan, and No. 2 for all hedge fund strategies, according to Shenzhen PaiPaiWang Investment & Management Co.
While China’s abrupt ditching of its Covid Zero policy has led to a surge in infections, economists expect a faster rebound once the outbreak subsides and as policy support expands, with growth forecast to accelerate to 4.8% this year from an estimated 3% in 2022.
Yet much of China’s fiscal stimulus goes to infrastructure without directly increasing household income, unlike in other economies, Banxia noted in the letter. China has been shunning the stimulus checks and consumer subsidies that fueled post-pandemic recoveries in the US and elsewhere.
And even if home sales recover, developers need one or two more years to repair their balance sheets before expanding again, while exports may see a mild contraction, heralding a slow economic recovery that will be “very likely below” a level deemed desirable by the government, Banxia said.
The slump in China’s home sales even deepened last month, despite a broad support package rolled out in November.
Still, Banxia stuck to its optimistic view that the market could be close to the start of a long bull run, which will be supported by a recovery in risk preferences followed by a rebound in the economy and corporate earnings.
The first step is “basically done,” the letter said. “The second step will take some more time.”
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