Weekly Update: Saxo Thematic Investing Performance

The Chinese paradox

Last week was driven by two narratives and trades. China is reopening its economy loosening its strict zero Covid policy and Europe must increase its military strength after a loose missile struck ground in a small Polish town close to the border of Ukraine. As a result our China consumer & technology and defense baskets were the two best performing baskets up 4.4% and 2.3% respectively.

What is a bit striking is the divergence between our two Chinese baskets. The one tracking the large cap consumer and technology companies was up 4.4% and consists of many liquid stocks traded in Hong Kong and thus more easily accessible by foreign investors. The other basket tracks the little giants of China, which are mainly hardware technology companies listed on the mainland exchanges and thus are dominated by domestic flows, and was down 1% last week. Was last week a story about foreign investors buying the ‘Xi pivot’ on the country’s Covid policy and domestic investors less certain about the direction and speed?

In any case it is clear today that the path to leave the strict zero Covid policy will be a lot more bumpy. Shijiazhuang, a city of 11mn people around 300 kilometers from Beijing, has moved back into a restrictive policy mode forbidding residents in high risk areas to leave their homes. While China has a lot of incentive to opening up again to kickstart the economy the path is likely not to be smooth as investors have priced in over the past two weeks.