Whilst developed world investors panic about the Covid-19 outbreak, it seems that Chinese investors have stopped worrying as much and started buying again.

That at least is the rather contrarian message coming from John Tsai, Portfolio Manager at Eastspring Investments and Ken Wong, Client Portfolio Manager and Asian Equity Portfolio Specialist at Eastspring Investments.

They put out a note today which observed that Chinese small caps are outperforming. Yep, the mass of local retail speculators are back in business – I suppose if you are stuck at home staring at a screen for days at end, then maybe having a dabble on the stock market is a bit of fun!

Here are the Eastspring comments:

“Small caps are likely outperforming due to a number of regulatory support measures that have been aimed at supporting SMEs amid the COVID-19 outbreak. In particular, we’ve seen targeted liquidity and credit support, targeted tax cuts, and targeted cost cuts. The most significant is probably the easing liquidity. A lot of liquidity has been injected into the system, and historically China A-shares, and in particular small and mid-caps, have tended to react more favourably to increased liquidity.  The small-cap outperformance could also be partly attributed to the fact that a lot of the stocks listed on the Shenzhen and ChiNext boards aren’t available to offshore investors via StockConnect, and hence both markets are dominated by more speculative Mainland Chinese retail investors who are less valuation sensitive.

 “There is clearly risk of a bubble given how Shenzhen, SME and ChiNext have rallied and are significantly more expensive compared to the underlying CSI300. That said, one supporting factor is the relatively higher earnings growth expectations for Shenzhen, SME and ChiNext”.

This is I think hugely interesting. A few weeks ago in an article for MoneyWeek, I observed that Asian investors weren’t properly quantifying the risks from the outbreak in shares prices. In a Citywire article, I also observed that I thought that developed world investors were in  state of denial about the severity of the outbreak.

Well, one part of that argument has worked out.

Developed world investors are in full panic mode now.

At the rate we’re going, I can see the FTSE 100 heading towards the 6400 level, which isn’t that far off the level last seen four years ago. If it heads down to 6300 we’d be in a proper 20% correction territory. At which point I’d be filling my boots with risky equities.

By contrast, the Asian bit of my observation, or at least the Chinese aspect of it, hasn’t quite worked out as I planned. As I’ve already noted above with Eastspring’s comments, Chinese investors have decided that the tide is turning on infections and that now is the time to get back in.

Personally, I wouldn’t be so sure that it is a slam dunk in investing terms, if only because we might now see a blowback effect on the Chinese economy as the developed world outside China slows down. Nevertheless, it is hard to argue with the China Viral Rebound thesis.

If that thesis does play out, then I think it might be worth looking again at some of the more small-cap Asian focused investment trusts.

In the table below I’ve mapped out recent returns for the main three small-cap Asian funds, all of which have a strong Greater China focus. It’s worth saying that all three are now near discount highs. My gut tells me that they might have another 2 to 5% to fall but they are potentially ideally positioned to bounce back sharply, with gains of 20% or more possible in my view.


AsiaPac Smaller Cos funds or indices Premium Discount YTD 1 month 3 month
Aberdeen Standard Asia Focus -13.9 -5.6 -6.5 -5.4
Fidelity Asian Values -3.2 -8.3 -7.1 -5.2
Scottish Oriental Smaller Cos -15.6 -8.9 -6.4 -7.4
iShares MSCI China Small-Cap ETF NR -3.5 1.5 1.28
ChiNext Index NR 15.21 15.7 21.8