Key Points
- Chinese shares plunge significantly over concerns with Covid-19 and the situation with Russia.
- I think some stocks that have a global presence could bounce back.
- Others are having a fall compounded by business specific issues, which I’d stay away from.
It’s been a tough start to the week for stock markets in Asia. The Hang Seng index dropped 5.7%, with the Shanghai Composite index also down just shy of 5%. Over a one-year period, the two markets are down 36% and 11% respectively. There are some large names that are listed here, including Tencent, Bank of China and HSBC. So with this downward move, should I be taking advantage and buying as Chinese shares plunge?
Why Chinese shares have fallen
From my point of view, there are two main reasons for the fall this week. Firstly, higher Covid-19 case numbers have meant the government has tightened restrictions in some provinces. For example, on Sunday those in the Shenzhen province were told that they were going to head into a lockdown, with only essential businesses allowed to operate. The impact of this can already be seen from Foxconn, a supplier of iPhones, that’s having to temporarily halt operations.
Another reason for Chinese shares plunging this week is due to concerns around Russia. Although reports are not confirmed, there are rumours of Russia asking China for military support, and that China is open to providing military and financial aid. I have to be careful here as this might not be true, but the markets have definitely seen these headlines and reacted negatively.
What I’m doing now
As Chinese shares plunge, I need to be diligent in what I consider buying. For example, take HSBC. The global bank is dual-listed in both London and Hong Kong. It has had a presence in China for 150 years and currently has 160 outlets in 50 cities. It was exposed to the issues relating to the Chinese real estate market late last year, and had to take a credit charge on this in the 2021 annual report. However, it’s a global bank, with a good spread of revenue from different parts of the globe.
Therefore, I’d consider buying shares in HSBC, but would prefer to buy the listed stock on the London Stock Exchange. As a UK-based investor, it’s easier for me to buy UK-listed stocks that are denominated in British Pounds.
What about a company like Tencent? The huge Chinese conglomerate owns WeChat and other gaming and entertainment applications. Although the impact of Covid-19 should be limited on the business, it has also been hit by negative press reports. The Wall Street Journal published a report saying that it’s likely to face a record fine for breaking Chinese anti-money-laundering regulations. As a result, the share price dropped almost 10% overnight.
I personally will stay away from Tencent, as it seems to have fundamental problems beyond just investors being worried about Covid-19. Therefore, even if the Covid-19 risks and the dreadful situation with Russia dissipate in coming months, Tencent shares might not bounce back as much as those of other companies.
