StashAway slashes China allocation on fears of secondary sanctions

Singapore

SOME users of roboadviser StashAway opened their app on Monday (Mar 14) to find that their holdings in a key China technology fund were about to be completely sold off, marking a stark reversal in the company's stance towards China.

Even as a crackdown crushed tech valuations, StashAway had advised its clients to stay invested in the long term amid China's rapidly growing economy and path to technological revolution.

During a portfolio reoptimisation exercise last July, it maintained or increased most portfolios' allocation to the KraneShares CSI China Internet Fund (KWEB), the largest China tech exchange-traded fund (ETF) in the US.

On Monday evening, however, the company informed users it was slashing China exposure in clients' portfolios to between 0 per cent to 0.4 per cent, down from between 3 to 20 per cent, depending on risk profiles. China faces a risk of secondary sanctions due to its stance on the Russia-Ukraine conflict, it said.

StashAway is selling much of the China allocation at multi-year lows. The KWEB ETF's assets have plummeted almost 80 per cent from its US$104 billion peak in February last year, on the back of geopolitical tensions, regulatory scrutiny and Chinese ADR (American depositary receipts) delisting fears.

The ETF is down 42.5 per cent this year, wiping out 9 years of gains (including dividend payouts) since its inception, according to Bloomberg data.

StashAway's approach to asset allocation is different from that of other major roboadvisers. Its competitor Syfe said it has no direct exposure to Russia and Ukraine in its core portfolios, and does not plan to make major shifts in its allocation based on near-term events.

"Syfe portfolios are rebalanced twice a year in a systematic manner to maintain the strategic asset allocation that maximises long-term returns. We do not make changes in our portfolios based on near-term market 'noises' like active fund managers do," said head of investment advisory Ritesh Ganeriwal.

Endowus, a competitor of StashAway that focuses on unit trusts, said while it is concerned about the over-indebtedness of the Chinese economy and the unpredictability of the government policy on several issues, it is not making any drastic changes to its China allocation in its portfolios.

"We rebalance a client's portfolio if it sways too far from its target asset allocation and therefore its target risk-return goal, but we never time markets," said chief investment officer (CIO) Samuel Rhee. "That means we do not change the client's asset allocation, their equity and fixed income exposure, or geographic or sector exposure based on how we are reading market events."

Beijing's position on the Russia-Ukraine conflict has worsened investor sentiment regarding Chinese tech stocks. JPMorgan Chase on Monday downgraded 28 Chinese Internet stocks, including Alibaba and Tencent, calling them "uninvestable" over the next 6 to 12 months.

In its note to clients, StashAway cited the risk of secondary sanctions on China due to its close relationship with Russia, whose invasion of Ukraine last month sparked international condemnation. The company also said the US could weaponise the delisting of Chinese ADRs.

"Even a week ago, our long-term view remained intact. We thought the tech regulatory headwinds were about to be softened, most of it has been priced in and valuations are so attractive," StashAway CIO Freddy Lim told The Business Times, while highlighting the expectations of monetary stimulus by China's central bank.

"But that was overshadowed by potential sanctions risks. This is a different ballgame now - you cannot analyse this from a traditional or fundamental investors' angle anymore."

For most StashAway portfolios, incremental allocation will go to Australian and Japanese equities, international treasury bonds and international inflation-linked bonds, the company told clients.