Scottish Mortgage joins China shares rally

Chinese shares and assets exposed to the region have been aggressively sold over the past month, but news out today is floating all boats. Our City reporter explains why. 

Tech titans Alibaba (NYSE:BABA) and Tencent (SEHK:700) brought relief to UK investors today after their sudden share price resurgence boosted the value of Baillie Gifford’s Scottish Mortgage (LSE:SMT) investment trust.

E-commerce giant Alibaba and WeChat owner Tencent — both top-10 holdings for the flagship trust — jumped 27% and 23% off recent lows after Beijing vowed to pursue policies that will support China financial markets and economic growth. This includes clearing up the uncertainty hanging over the regulation of internet companies “as soon as possible”.

The country’s top financial policy committee also provided reassurance for China’s overseas-listed stocks after these shares were spooked on Friday by a US threat to delist firms that failed to meet audit inspection rules by 2024.

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As many as 270 companies are in danger, but China said today it was committed to finding a solution with US authorities. China’s support provided an immediate boost to the region’s stock markets, which have recently been hit by new Covid-19 outbreaks in the region.

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Hong Kong’s Hang Seng fell by more than 10% on the first two days of this week, but rallied 9% today amid optimism that lockdown restrictions in the southern tech-hub city of Shenzhen will not be as disruptive for supply chains as first feared.

This message was reinforced after Apple (NASDAQ:AAPL) supplier Foxconn said it had been allowed to carry on some production as long as its workers stayed within bubble conditions.

The sudden appetite for China equities saw the country’s tech index jump by as much as 20%. The developments also filtered through to the UK in a much-needed boost for several Asia-focused shares, including Prudential (LSE:PRU) after a recovery of 50p to 1050p.

As we reported yesterday, the latest restrictions in Shenzhen have put more pressure on Pru at a time when enthusiasm towards its new Asia and Africa strategy has been tested by ongoing tight border controls in its key Hong Kong market.

Buyers also returned to luxury goods group Burberry and Asia-focused lender Standard Chartered (LSE:STAN) as the FTSE 100 index jumped 128.43 points to 7304.13.

Scottish Mortgage investment trust posted the biggest percentage gain, rising 55.4p to 934p. However, the recent rotation away from growth stocks caused by expectations for higher interest rates means it remains about a quarter off its 2022 starting point.

Alibaba accounts for 2.3% of the portfolio and Tencent the fourth largest at 5.3%, based on valuations at the end of February. The biggest overall is vaccines maker Moderna (NASDAQ:MRNA) at 6.3%.

Scottish Mortgage, whose manager Tom Slater introduced Alibaba to the portfolio as his first private company investment some 10 years ago, addressed the regulatory uncertainty facing its Chinese tech holdings at an investors forum event earlier this month.

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Slater’s deputy Lawrence Burns pointed out that technology regulation is more than just a China issue, noting the EU’s approach to gig economy workers at delivery platforms or the US Department of Justice (DoJ) challenging Google on various practices.

He said: “What we’re seeing in China is therefore an answer to a global question that we’re struggling with everywhere: how do you interact as a society with these incredibly powerful technology platforms?

“The difference in China comes from the nature of the system and the approach. And so, it is an approach that is faster, so the DoJ will take several years before it even gets to trial with Google.”

Burns told the forum that much time is spent going through Chinese holdings to work out the mechanics of regulation and what this means for investment scenarios on a five-to-10-year view.