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China’s regulatory crackdown creates value in parts of market

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The bottom fishing in China’s market has begun.

The country’s new restrictions on its education and technology companies should come as “par for the course” for emerging market investors, Astoria Portfolio Advisors founder and chief investment officer John Davi told CNBC’s “ETF Edge” this week.

“There’s always regulatory risk investing in China,” he said in a Monday interview. “Over the last 10 years, there’s been a series of regulatory tightening policies in China across a number of different sectors. Each time that sector gets hit 20-50%.”

“Right now, there’s value in there,” he said. “I think there’s more downside, but I think long term, … there’s a way to monetize these billions of people in broad emerging markets and China’s a good way.”

In the last month, the KraneShares CSI China Internet ETF (KWEB) has raked in around $2 billion in inflows, a sign that some investors are looking to the downtrodden group for value, Davi said. The ETF is down roughly 23% in the past month.

“I still think the right thing to do is to have a globally diversified portfolio and have some exposures to emerging markets and China and other developed markets,” he said. “I know it’s tough, but you really want to have a long-term time horizon.”

Not all U.S. investors will agree, Life + Liberty Indexes founder Perth Tolle said in the same interview.

“These are the very issues why people don’t invest in emerging markets in the first place: a lack of transparency and the political risk,” Tolle said.

“In a time when U.S. valuations are so high, you don’t want to be discouraging people from investing overseas,” she said. “Unfortunately, I think that is what’s going to happen here, especially since China makes up 40% of most emerging market indexes.”

Tolle’s solution is to invest outside of China in countries with freer people and markets. Her firm runs the index behind the Alpha Architect Freedom 100 Emerging Markets ETF (FRDM), a fund that weighs its holdings based on civil, political and economic liberties.

Its top holdings are Taiwan Semiconductor, Samsung Electronics, Bank of Central Asia and Bank Pekao, and its largest country weightings are Taiwan, Chile and South Korea.

“We believe that growth in the next decade is to be found in countries that are more free in the emerging markets. Yes, there’s going to be trade with China, and we don’t penalize free trade. Trade is good and that’s part of their economic freedom. But these are not companies that answer to the Chinese state,” Tolle said.

“These are not companies where the state can come in overnight and wipe out all of your value because you’re now required to be a nonprofit like we saw with the edu-tech companies,” she said. “You’re still going to have some indirect China exposure through trade and you’ll have that even in the S&P 500, but there’s no need to double up on that.”

For EMQQ ETF founder and chief investment Kevin Carter, the panic around China’s crackdowns makes for an “incredible opportunity,” he said in the same interview.

“This series of regulatory issues is just normal management of the country. It’s the financial system. It’s monopoly rules. And these are not unique to China,” Carter said, pointing to U.S. officials’ target on Big Tech and the European Union’s Google probes.

“This is about government getting its arms around the power that a lot of these technology companies have and making sure that they have rules and regulations in place that are for the good of society,” Carter said.


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