1. What would likely be the impact on markets and the portfolio if the US imposes sanctions on China and special trading status with Hong Kong?
Sanctions are certainly a potential risk as rhetoric is increasingly contentious between the US and China. However, the nature of any potential sanctions will determine the potential impact on markets. A return to tariffs as a policy tool, for instance, would be among the more detrimental to the market, as we have seen in past episodes. On the other end of the spectrum, there are many potential sanctions that would be more symbolic and would likely have minimal impact on the market. Hong Kong’s special trading status has been a common topic of conversation in the past few days, here we note that the favorable export tariff treatment Hong Kong receives is likely less relevant (~1% of exports to US) than the potential signaling and escalation of tension that might result. Our general view is that this will remain a hot button political issue but will not spiral. It’s in nobody’s interests to have things deteriorate significantly further and any sanctions would likely be symbolic and very targeted to individual actors.
2. What is your view on China premier’s recent announcement that they would not be providing a growth target for 2020, and instead, focus on providing stimulus in certain segments of its economy (i.e., social welfare and labor markets)? Is there a specific issue in China, Asia or EM that the team is more focused on? How does the news affect portfolio positioning?
While this is the first time that a numerical growth target has been omitted, we view this as a continuation of the recent trend away from a focus on numerical growth targets and towards a focus on, as mentioned, employment and social initiatives. In this light, this omission is less dramatic than it may seem at first glance. Importantly, the absence of near-term growth targets should provide some flexibility for future policy responses and a more long-term perspective on growth. We see the government continuing its focus on social welfare policies rather than overt stimulus spending to hit faster growth targets, which is a positive for the economy overall. The social safety net in China is extremely small relative to similarly developed countries and consumption would be bolstered by strengthening it. From a positioning perspective, the evolution of COVID-19, policy responses, and potential recovery trajectories have shaped our view of risk and guided our positioning. Most of our growth thematic exposures (gaming, telemedicine, online education, etc.) have all seen growth rates accelerated of late and we expect the longer-term positioning of many of our portfolio companies to have been strengthened by recent events. Geopolitical risk also features prominently in our conception of risk in the region.
3. China also announced amending a national security law that threatens Hong Kong democracy and raises some concern on geopolitical tensions between US and China. Any thoughts or action with respect to impact on positioning and managing near term risk?
The Hong Kong Security Law has certainly added to the existing tension between the US and China, and it introduces certain tail risks to potential returns in the region. Accordingly, we have reassessed our positioning and lightened positions in specific names that would be most negatively affected by an increase in Hong Kong/China tensions. From a risk management perspective, we intend to limit our exposure to names where the potential impact is asymmetrically negative, this includes businesses which would be directly hurt by unrest in Hong Kong, which we see as the most likely outcome this summer. Beyond that, we think that China views Hong Kong as its territory and there’s little doubt that it will manifest in a weakening of Hong Kong’s autonomy over time. We are dubious about the likelihood that there is some major defining event which brings this about (i.e. PLA storming Hong Kong streets) but rather a loss of independence over time.
4. If the “Holdings Foreign Companies Accountable Act” is passed, are there any US Exchange China listed companies held in the portfolio that you consider may be at risk of being delisted by the US or in reaction, by China? How would you manage the exposure if a name held in the portfolio were delisted?
It is important to note here that there is a temporal cushion built into this policy. Specifically, suspension or delisting would become an issue for listed companies that do not abide by the relevant accounting conditions over a three-year period. This is not to say that there is not any risk of delisting, but that we would view this more as a process than a discrete event immediately following potential passage of the Act. Additionally, many companies have already begun the process of dual listing on the HK exchange; we expect that many of the companies who would be at risk of potential delisting will avail themselves of this option. Our intention would be to avoid holding names during a delisting event. To this end, we are actively monitoring the evolution of the Act, its conditions, and the reactions of the market and the relevant names.
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