The past 18 months have not been kind to Chinese stocks. The MSCI China index slumped by nearly 19% last year, and while investors recouped some of their losses in the first quarter, shares have continued their descent since April.
The drubbing is justified: fears of a global recession (reflected in falling bond yields); the cascading impact of trade tensions (agonizingly, tweet by tweet), not to mention currency devaluations (as the yuan hit an 11-year low against the dollar); and the ongoing unrest in Hong Kong (paralyzing one of Asia's largest financial hubs) have all played a role in the weakness. But the collapse in equities in 2015 and 2016 was even worse, so volatility in Chinese equities is nothing new.
However, trying to avoid volatility by timing Chinese exposure is difficult to do. And those who do try to time the market are likely to miss at least a portion of the rebound. This is a lesson — after the 2015-2016 bottom — many learned when the MSCI China index was up nearly 55% the following year.
There is a better way: go long value, long momentum and long quality; focus exposure on secular trends in China and mean-reverting value trades; and, importantly, short the areas exposed to the country's heightened near-term risks and longer-term secular losers. It sounds easy. The catch is that long/short investing in China is more complicated than traditional approaches in developed markets, which creates advantages for those able to navigate the complexity.