Big Bets on China Green Stocks Drag Down Top Asia Funds

(Bloomberg) — Asia’s best-performing equity funds of last year have now tumbled to near the bottom of the pile as their bets on China’s green energy rally turn sour.

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Driving the underperformance are the funds’ holdings in China’s renewable energy and electric vehicles, whose shares have taken a beating after two years of scorching rallies following Beijing’s carbon neutrality goals. Even as China reaffirms its policy easing stance, monetary tightening elsewhere has pushed up global borrowing costs, spurring a rush out of frothy shares.

The five stock mutual funds that handed investors at least 30% in total returns last year have all posted losses of about 6% or more since the start of 2022, according to data compiled by Bloomberg. Last year’s star, First State Cinda New Energy Industry Equity Fund, has lost 11%, versus an average loss of 4.7% among the region’s $1 billion-plus peers.

“Valuation has more than reflected its growth potential in the near term,” said Hao Hong, chief strategist at Bocom International. The “mismatch between green ambition and the reality of near-term dependency on traditional energy” may suggest the latter will have better returns in the short run, he said.

Asia’s equity markets have had a choppy start to the year as the prospect of rapid rate hikes by the Federal Reserve, combined with China’s uncertain growth outlook, weighs on sentiment. Against this backdrop, the weakness in some widely-held Chinese names like battery giant Contemporary Amperex Technology Co. has been unnerving.

CATL, a recurring name among top funds’ holdings last year, has lost more than $57 billion in market value since a December peak and is down 10% this year even with last week’s gains. This compares with less than a 2% drop in the MSCI’s regional benchmark and an about 6% fall in China’s CSI 300 index.

Among electric-vehicle supplier peers, Eve Energy Co.’s stock price is down 28% in 2022 while Tianqi Lithium Corp. has shed almost 11%. They gained 45% and 172%, respectively, last year.

“At this point, investors should reduce their expectations on short-term returns of new energy shares,” Zheng Zehong, manager of the China AMC Energy Innovation Equity Fund, which has lost near 6% this year, said in a Jan. 24 blog post. It’s “totally possible” for them to not outperform the indices for now, he added.

All five asset managers declined to comment on their performance for this story.

Meanwhile, equity funds doing well this year are those focused on the cyclicals-heavy Japan market, in line with a rotation out of expensive names into value stocks. The MAN GLG Japan CoreAlpha Equity fund and the Arcus Japan Fund had total returns of more than 8%.

Looking Up

Over the longer term, China’s push to have net-zero carbon emissions by 2060 in what’s already the world’s largest renewables market means the industry has significant room to grow. But last year’s severe energy shortage in China underscores the delicate balance policy makers face between achieving green ambitions and preventing hiccups along the way.

READ MORE: How China Plans to Become Carbon-Neutral by 2060: QuickTake

“We’ll need to see more stabilizing signs before investors could turn a bit more bullish on the growth sector, so it will take time,” said Winnie Chiu, senior equity adviser at Indosuez Wealth Management.

Things may start to look up for China’s new energy funds later in the year, as stock valuations come down and the government continues to roll out initiatives to meet its climate goals.

CATL is now trading at 52 times forward earnings estimates compared to an all-time high of 128 times, while Eve Energy is trading at a multiple of 33. Ganfeng Lithium Co.’s valuation has dropped to 28 times, about one-fifth of its peak.

Green-transition policies announced so far may be less exciting than what had been expected by the market “in terms of timing and strength,” said Evan Li, an analyst at HSBC Holdings Plc, adding that policy tailwinds from the National People’s Congress and the Chinese People’s Political Consultative Conference meetings in March could be “catalysts to watch.”