Investors turned increasingly cautious on Chinese stocks, especially those listed overseas, in the first quarter of the year that was rocked by geopolitical tensions and worries about growth.
That’s according to data from research firm EPFR Global.
While the period ended with more than $20 billion in net inflows to mainland Chinese stocks, the bulk occurred in January, and the pace of buying dropped sharply as the quarter progressed, the data showed.
The first three months of the year saw the U.S. and Europe sanction Russia over its invasion of Ukraine, while China pursued a more neutral position. The quarter also saw growing worries about forced delisting of Chinese stocks from U.S. markets amid a flurry of announcements from both countries’ securities regulators.
“Anything that relates to China we can find in causality and reasoning from either Russia or [the] U.S. right now,” said Steven Shen, manager of quantitative strategies at EPFR. The firm says it tracks fund flows across $52 trillion in assets worldwide.
ESG investment flows
Chinese stock funds focused on ESG — environmental, social and governance factors — saw inflows until mid-February, when they began seeing outflows instead, Shen said.
In contrast, global ESG stock funds saw “very consistent” inflows over the first three months of the year, he said.
The firm did not share specific reasons for the divergence.
ESG-related concerns drove other investment allocation changes.
Among the headlines of the first quarter, Norges Bank Investment Management — an investment arm of Norway’s central bank which manages the world’s largest sovereign wealth fund — announced it will exclude shares of Chinese sportswear company Li Ning “due to unacceptable risk that the company contributes to serious human rights violations.”
When contacted by CNBC in late March, the fund declined to elaborate further, but noted the Norwegian government asked the fund to freeze investments in Russia and prepare a plan for divesting from the country. The fund had a market value of more than $1.2 trillion as of Monday.
Li Ning did not respond to a CNBC request for comment.
Swapping U.S. shares for Hong Kong ones
While mainland Chinese stock funds held onto inflows, European stock funds saw billions of dollars in net outflows in the first quarter, according to EPFR.
Japanese stock funds saw declines as well, the data showed. It also showed U.S. stock funds retained strong net inflows, for a total of more than $100 billion in the first quarter.
For Chinese stocks listed in Hong Kong and the U.S., Shen noted a “consistent decrease” in funds’ exposure.
Beginning late 2021, fund managers began to sell U.S.-listed shares of a Chinese company for those traded in Hong Kong, which has contributed to declines in those share prices, Shen said. The process for exchange-traded funds typically takes three to six months, he said.
Many Chinese companies have offered shares in Hong Kong as political pressure in both the U.S. and China increased the risk of a New York delisting.
“Moves by the US regulator on ADRs and the Russia-Ukraine conflicts have further complicated the situations and caused substantive market swings this year,” Max Luo, director of China asset allocation at UBS Asset Management, said in a statement. “We noted sizeable outflows from China equities since last year, reflecting a notable de-risking on China.”
ADRs are American Depositary Receipts, which refer to shares of non-U.S. companies that are traded on U.S. exchanges.
“We have turned more conservative toward equity overall as the Russia-Ukraine conflicts flare up amid an uncomfortably high inflation level,” Luo said. However, he said his firm has “become more constructive on Chinese equities” due to government policy support.
Worries about growth
Mainland Chinese stocks saw a surge of buying at a level not seen since January 2019, Shen said.
He pointed out that it took place when index company MSCI added the mainland Chinese shares to a benchmark, which forced fund managers tracking the index to buy the mainland shares.
But the Shanghai composite remains more than 12% lower for the year so far.
That’s despite a mid-March lift to stocks after state media reports of comments from Vice Premier Liu He eased worries about Beijing’s crackdown on tech and real estate, and overseas IPOs.
Many investment banks had turned positive on mainland Chinese stocks as 2022 kicked off, despite poor domestic market sentiment.
“The macroeconomic backdrop appeared to improve at the end of last year,” David Chao, global market strategist, Asia Pacific (ex-Japan) at Invesco, told CNBC in early April.
“But I think expectations have gotten ahead of themselves” especially since the property market hasn’t found a bottom yet, he said. “Market sentiment seems to be impacted by a property market downturn.”
UK inflation hits new 40-year high of 10.1% as food and energy price surge continues
U.K. inflation rose to another 40-year high in July as spiraling food and energy prices continued to intensify the country’s historic squeeze on households.
The consumer price index rose 10.1% annually, according to estimates published by the Office for National Statistics on Wednesday, above a Reuters consensus forecast of 9.8% and up from 9.4% in June.
Core inflation, which excludes energy, food, alcohol and tobacco, came in at 6.2% in the year to July 2022, rising from 5.8% in June and ahead of projections of 5.9%.
British 2-year Gilt yields surged on Wednesday morning after the release, adding more than 26 basis points to reach 2.41%, their highest point since November 2008.
Rising food prices made the largest upward contribution to annual inflation rates between June and July, the ONS said in its report.
“Supermarkets have had little choice but to pass on price increases from suppliers, themselves contending with unprecedented inflation in raw material and ingredient input costs,” said Kien Tan, director of retail strategy at PwC.
“This has been particularly acute in labour and utility intensive categories like dairy, with reports of the price of a pint of milk having more than doubled in some stores since the start of the year.”
The ONS repeated that its indicative modelled consumer price inflation estimates “suggest that the CPI rate would last have been higher around 1982, where estimates range from nearly 11% in January down to approximately 6.5% in December.”
The Bank of England has implemented six consecutive hikes to interest rates as it looks to rein in inflation, and earlier this month launched its largest single increase since 1995 while projecting that the U.K. will enter its longest recession since the global financial crisis in the fourth quarter of the year.
The Bank expects inflation to top out at 13.3% in October. Conservative Party leadership candidates Liz Truss and Rishi Sunak, one of whom will succeed Boris Johnson as prime minister on Sept. 5 after a poll of party members, are under increasing pressure to offer radical solutions to the country’s historic cost-of-living crisis.
The latest forecasts suggest the U.K.’s energy price cap could rise to £4,266 ($5,170) annually early next year from its current £1,971, with many households already choosing between heating and eating. The cap is expected to rise to more than £3,000 in October following the next review.
Real wages in the U.K. fell by an annual 3% in the second quarter of 2022, according to ONS data published Tuesday, the sharpest decline on record.
Despite average pay excluding bonuses increasing by 4.7%, the cost of living is far outpacing wage growth and squeezing household incomes.
“Today’s inflation figures serve as a further reminder to many UK households that they are facing a period of considerable financial hardship,” said Dan Howe, head of investment trusts at Janus Henderson.
“Consumers are already grappling with rising energy costs and surging household prices, all compounded by a lack of decisive action at the political level. Amid talks of strikes and energy blackouts, there is no doubt that tough decisions lie ahead of U.K. families.”
Richard Carter, head of fixed interest research at Quilter Cheviot, predicted that the Bank of England will likely respond at its next monetary policy meeting with yet another 50 basis point interest rate hike in a bid to combat inflation, and said there is no doubt that the cost-of-living crisis is going to get worse before it gets better.
“As such, there will no doubt be a lot of pressure on the next Prime Minister to help soften the blow and the Bank of England will continue to have a very difficult job on its hands,” he added.
External reserves sustains downward trend, sheds $337m in 2wks
Nigeria’s external reserves fell by $337 million in the first two weeks of August, maintaining its declining trend since the middle of last month.
Data from the Central Bank of Nigeria showed that the external reserves fell to $38.882 billion on Thursday August 11th, 2022, from $39.219 billion at the end of July 2022.
This indicates that the external reserves has lost $563 million since July 18, when it commenced the latest downward trend.
Prior to July 18, the external reserves had maintained a 40 days upward trend, rising by $976 million to $39.445 billion from $38.421 billion on June 6th, buoyed by rise in the price of crude oil, which accounts for over 80 per cent of the nation’s foreign exchange earnings.
However, analysts at Financial Derivatives Company Limited, FDC, attributed the declining fortunes of the reserves since July 18 to increased dollar sales by the Central Bank of Nigeria, CBN, in its bid to stabilise the exchange rate.
While projecting further decline in the external reserves, they however maintained that the increased dollar supply by the apex bank will lead to appreciation of the naira at the official and parallel market.
Making this projection in the FDC Bi-Monthly Economic Bulletin, they said: “The depletion on the reserves was majorly due to CBN’s supply of foreign exchange to stabilise the currency.
“The external reserves is expected to continue its downward trend as the CBN intensifies its efforts to stabilise the currency by supplying foreign exchange to the I & E (Investors and Exporters) window.
“Because of the country’s low oil production levels, high oil prices may have less of an impact on the country’s external reserves.
“A constant depletion of the external reserves is likely to discourage the CBN from supplying foreign exchange in the foreign exchange market. This could further stoke currency depreciation as demand outpaces supply.”
Nigeria loses N101bn worth of oil, says OPEC
Nigeria’s crude oil production plunged by 2.3 million barrels in July 2022 when compared to what the country produced in the preceding month of June, data from the Organisation of Petroleum Exporting Countries showed on Thursday.
In its latest Monthly Oil Market Report for August 2022, OPEC stated that crude oil production figures based on direct communication indicated that Nigeria’s output dropped by an average of 74,000 barrels per day in July.
This implies that for the 31 days in July, the country lost about 2.3 million barrels of crude oil. The organisation further stated that the average cost of Brent crude, the global benchmark for oil, during the month under review was $105.12/barrel.
By losing 2.3 million barrels in July this year, it means Nigeria’s oil earnings fell by about $241.1m or N101.13bn (at the official exchange rate of N419.37/$) in the month under review.
Data from OPEC showed that Nigeria’s oil production in June 2022 was 1.158 million barrels per day, but this dropped to 1.084 million barrels per day in July.
The country had produced 1.024 million barrels per day in May this year, according to figures released by OPEC on Thursday.
The Federal Government, operators and experts have consistently fingered crude oil theft in the Niger Delta as the major reason for Nigeria’s poor output and its continued failure to meet the monthly oil production quota approved by OPEC.
The Chief Executive Officer, Centre for the Promotion of Private Enterprise, Dr. Muda Yusuf, blamed the challenges in the oil sector on the high level of insecurity across the country.
This, he said, had continued to discourage investors in the sector, leading to lower production of crude oil and lower earnings for Nigeria despite the increased cost of crude.
He said, “Investors in the oil and gas sector continue to lament the challenges posed by insecurity, oil theft, unstable policies and inappropriate fiscal regimes.
“The downstream sector has continued to be weighed down by the pricing regimes and the regulatory environments which have continued to dim the growth prospects in the sector.”
Meanwhile OPEC stated that crude oil prices dipped in July, as against their costs in June, adding that crude in OPEC Reference Basket fell by $9.17 or 7.8 per cent month-on-month in July to average $108.55/barrel.
“Oil futures prices remained highly volatile in July, amid a sharp drop in liquidity. The ICE Brent front month declined $12.38 or 10.5 per cent in July to average $105.12/barrel and NYMEX WTI declined by $14.96 or 13.1 per cent to average $99.38/barrel,” the global oil cartel stated.
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