MAPS 3Q23 update: Three key changes to our portfolios that investors should be aware of

• Given China’s bleak economic outlook, we trimmed our Chinese equity exposure from neutral to underweight (6% to 3.5%), as well as removed the iShares Hang Seng Tech ETF from our tactical portfolio.

• Following our underweight in Chinese equities, we increased our allocation to the digital economy from underweight to neutral (7.5% to 10%). 

• Within the digital economy sleeve, we swapped the ALPS O'Shares Global Internet Giants ETF with the Invesco Nasdaq Internet ETF as the latter has significantly higher exposure to large cap tech names, which are expected to perform relatively better as grow slows.

• We also added the VanEck Semiconductor ETF to the digital economy sleeve in order to make our exposure to the sector more complete. 

In the latest round of rebalancing, we have made three key changes to our portfolios, summarised in Table 1 below. In this article, we will share in greater detail what these changes are, and the rationale behind each of them.

Table 1: List of recent changes to our portfolios 

1. Taking a more decisive underweight to Chinese equities

The first change that we implemented was to take a more decisive underweight to Chinese equities, (i) by reducing China’s allocation from 6% to 3.5%, from neutral to underweight, and (ii) by removing the iShares Hang Seng Tech ETF from the tactical sleeve of our portfolios. 

As you probably already know, we have taken a contrarian position on China since November last year. At the time, China just lifted its covid zero policy and its stock market went on an eye-popping rally. Many market participants were increasingly bullish over the prospects of Chinese equities following the country’s reopening, lifting the MSCI China Index by nearly 50% (in SGD terms) between October 2022 and January 2023. 

Fast forward to today investor optimism has faded, and the rally has clearly lost its legs. Chinese equities have fallen by more than -20% from its peak in January 2023 as the country continues to struggle with a host of problems, such as poor investor confidence, potential troubles in its shadow banking industry and a never-ending property crisis just to name a few.

China’s massive property sector, which is estimated to account for 30% of the domestic economy and up to 80% of household wealth continues to crumble, rippling through the wider economy. Despite multiple efforts by policymakers to revive the property sector, it remains stuck in the doldrums. New home sales have tumbled for the fourth straight month in September while home prices continue to slide (Figure 1). 

Figure 1: China’s property sector remains stuck in the doldrums 

The government’s heavy-handed crackdown has left the property sector in shambles, as more than two thirds of the nation’s developers are estimated to have defaulted on their debt. More recently, Country Garden (one of China’s largest property developers) has been hit with a liquidity crisis and is on the verge of default while Evergrande’s debt restructuring plan suffered a setback. China’s property crisis has left many suppliers unpaid and homebuyers without their homes, a further dent to consumer confidence.

Aside from China’s near-term troubles, there are also longer-term structural issues to contend with. China’s shift to a top-down state-controlled economy could see the country focus more on state goals, rather than prioritising domestic growth or the profitability of private companies. Several multinational companies are also starting to pursue a “China plus one” strategy, which should lead to weaker foreign direct investments. 

With the country facing a multitude of challenges, any quick recovery is unlikely. While some investors may find current valuations enticing, we believe that Chinese equities may be a value trap rather than a value opportunity.

Related Article: Is China’s stock market finally too cheap to be ignored?

2. Raised digital economy from underweight to neutral

Following our underweight in China, we have also taken the opportunity to raise our allocation to the digital economy from the previous weight of 7.5% to the current weight of 10% (underweight to neutral). While we have long held the view that the digital economy should be a core allocation within investors’ portfolios given its massive growth potential and relative size within the global economy, lofty valuations and fears of a deep recession (which tends to hurt growth stocks more as earnings expectations plummet) has kept us from taking a bigger position. 

Now that there are more visible signs of a soft landing and valuations have normalised slightly, we can afford to take a slightly more optimistic view of the sector. Our confidence in this sector is also partially underpinned by our new fund pick - the Invesco Nasdaq Internet ETF (NASDAQ:PNQI) - which has replaced the previous ALPS O'Shares Global Internet Giants ETF (BATS:OGIG). 

The main reason for replacing OGIG with PNQI is the latter’s significantly higher exposure to large cap tech stocks, which tend to perform better than their small cap counterparts in a slowing growth environment like what we are experiencing today. This can be seen clearly from their weighted average market cap – USD 548 billion vs USD 347 million of PNQI and OGIG respectively. 

Large cap tech stocks usually possess more defensive attributes, such as robust balance sheets, competitive advantages and more resilient earnings growth potential vs their smaller peers, many of which are trading at lofty valuations but are unprofitable. These characteristics allows them to tide through tough times with ease and emerge stronger than before. The defensive quality of big tech stocks can also be observed from the lower maximum drawdown of PNQI (-59.7%) vs OGIG (-66%) (Table 2).

Related Article: Why these technology stocks are better than the rest

Table 2: PNQI has a significantly larger exposure to large cap tech stocks compared to OGIG 

Astute investors may be quick to point out that PNQI has a higher expense ratio compared to OGIG (0.6% vs 0.48%). However, we think that the benefit of having greater exposure to large cap tech stocks outweighs a slight increase in expense ratio. Furthermore, PNQI is also the more liquid ETF among the two, with a larger trading volume and tighter bid ask spread. 

Apart from raising the allocation and making a fund switch, we have also added the VanEck Semiconductor ETF (NASDAQ:SMH) as one of our funds for the digital economy sleeve. Previously, our digital economy exposure came purely from internet companies. But given that semiconductors are the bedrock of all technology, we concluded that our digital economy exposure would not be complete without some representation from chipmakers, thus the inclusion of SMH. 

Moving forward, our digital economy segment will be represented by both the Invesco Nasdaq Internet ETF and the VanEck Semiconductor ETF. 

3. Product changes & removals 

Last but not least, we have made two other product changes to our portfolios. The first is to replace our existing Asian investment grade bond fund (First Sentier Asian Quality Bond A DIS SGD-H) with the Manulife Asia Pacific Investment Grade Bond A MDis SGD. The performance of the First Sentier Asian Quality Bond fund has been rather poor, which is likely due to its higher exposure to China. On the other hand, the Manulife Asia Pacific Investment Grade Bond fund has held up relatively well despite the turmoil in the Asian bond market (Figure 2). The Manulife Asia Pacific Investment Grade Bond fund is also on the 2023/24 edition of our Recommended Funds List.

Figure 2: The Manulife Asia Pacific Investment Grade Bond fund has performed considerably better

Finally, we have removed the Blackrock Asian Growth Leaders A2 USD fund from our portfolios, reducing the total the total number of funds in the growth portfolio from three to two. Among all the funds within the Asia ex Japan sleeve, this fund has the highest exposure to Chinese equities at nearly 35%, which we aim to minimise.

The two remaining funds, the FSSA Dividend Advantage and Schroder Asian growth fund are more than capable of providing exposure to the Asia ex Japan market. Both funds have also placed well above the Blackrock Asian Growth Leaders fund according to our selection methodology, and have been featured on our recommended funds list for multiple years running.  

Table 3: Current inter-asset allocation

Table 4: Intra-asset allocation for fixed income

Table 5: Intra-asset allocation for equities 

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