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Act global but think local on Covid impacts

by uma

By Ronald Chan, Founder of Chartwell Capital the Hong Kong based independent investment manager focused on Hong Kong and Mainland China listed equity.

As China’s management of Covid continues to diverge from that of many other markets, investors are attempting to understand the approach and its implications for investments in local asset classes. Ronald Chan, Founder of Chartwell Capital, the Hong Kong based independent investment manager, outlines his local insights.

China’s Covid lockdown predicament can be summed up by a personal experience, notes Ronald Chan, the founder of independent investment manager Chartwell Capital.

“In Hong Kong, cases are rising, but business in general is as usual. The government is likely to take new measures by relaxing the quarantine policy soon, and since there will be some major international conferences and events in November, there is a chance that the quarantine policy will be further relaxed,” he says.

It is noticeable from Hong Kong how several of the better-known global news services seem to be misunderstanding the wider situation regarding Covid in and around China, Chan continues.

“A lot of people have repeatedly criticised the Zero Covid policy. We must acknowledge that China has 1.4 billion people. There may be some 700 million who are pro-business and are in the middle class, so a Zero Covid policy may hurt their businesses. But then there are still some 700 million or so living in a lower socioeconomic tier.”

“With many living in poverty, around 300 million people in China are making only one US dollar a day. These people may lack healthcare and support if they get Covid, so Beijing has to make a tough call by balancing the livelihood of the entire nation, which is not easy. ”

“Similarly in Hong Kong, it is easy to criticize the 7-day quarantine policy when many other parts of the world have opened up, but if you look behind the decision, it is actually a Catch-22 situation. If we open to the world, we may attract international visitors and maintain Hong Kong as an international city. If we don’t and just open the border with mainland China, which requires zero Covid, we may rescue our local economy.”

“There are roughly 60 million annual visitors to Hong Kong – per the pre-pandemic trend – some 50 million come from China and 10 from the rest of the world. Without the 10 million visitors, the Hong Kong economy will suffer – but not as much as missing the 50 million Chinese visitors.” 

Watching the COVID policy has reaped enormous benefits over the past two years, says Chan, referencing stocks whose prices are highly correlated to the state of Covid in segments such as local retailers, local department stores, local property developers, regional airlines, hospitality or healthcare companies operating beauty clinics or other related parlours.

“What we have seen is range-bound movements. We must take a very active approach in buying quality businesses, with company management we can trust that are here to survive. At the same time, we dynamically rebalance our portfolio in respect of each company on the basis of change in local policies. I call this a ‘buy-and-hold-and-rebalancing approach.’” 

“With that said, COVID will pass. As we count down towards a new quarantine policy, added with potential economic stimulus or regulatory easing from Beijing, maybe the range-bound movements will break out towards the upside. After all, we’ve been in a bear market since last year and valuation has come down to extremely attractive levels with dividend yields showing their widest spreads against an anticipated rising interest rate environment.” 


Regardless of the particular Covid policy approach, a market such as Hong Kong continues to enjoy factors that make it interesting for investors, Chan continues.

One is the currency peg, which reduces currency risk.

“While a strengthening US dollar affects many international currencies, the fact that the Hong Kong dollar is pegged to the US dollar means that investors have one less factor to worry about.” 

At the macro level, while China’s GDP growth has slowed, it remains faster than many other places. For international investors concerned about investing in Chinese companies listed in China and the US, Hong Kong remains the best gateway to gain such an exposure and capture growth.

And the local market offers access to international standards. All listed companies in Hong Kong report in accordance with IFRS (International Financial Reporting Standards); they comply with Common Law; and they can access liquidity in line with the relative total market capitalisation size of the Hong Kong Stock Exchange, which means it can absorb abundant capital flows, Chan notes. 

“Indeed, big money needs a big pond, and Hong Kong is one of them. Last but not least, stocks listed in Hong Kong currently have the lowest valuation and the highest dividend yields. For all of these reasons, I am bullish on Hong Kong!”

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