The Economist May 21st 2022 Finance & economics 71F
ewchinesecompanieshavecaught
the imagination of global investors
like its technology firms. But they have
suffered a catastrophic spell. At one
point in March, they had lost about 70%
of their value since their 2021 peak. On
March 14th Alex Yao of JPMorgan Chase
and his team published a set of gloomy
reports on internet firms such as Aliba
ba, an ecommerce giant, Dingdong, an
online grocer, and Netease, a maker of
computer games. Mr Yao fretted about
the industry’s prospects over the next
year, owing to China’s economic slow
down, its regulatory crackdown on tech
and its souring relations with the West.
Some of the reports even described the
sector as “uninvestible”.
That word caused a bit of a furore.
JPMorgan lost its position as the lead
underwriter for the listing in Hong Kong
of Kingsoft Cloud, a Chinese cloud
computing firm. According to Bloomberg
on May 10th, editors at the bank had in
fact tried to replace “uninvestible” with
the less apocalyptic “unattractive”. But
some mentions slipped past them.
Using the word was undiplomatic.
But was it justifiable? It has been bandied
around quite freely in recent years, ap
plied not just to the usual suspects, such
as Russian or Iranian assets fenced off by
financial sanctions, but also to less
obvious candidates. Jim Cramer of cnbc,
a tvchannel, described oil stocks as
uninvestible in January 2020, calling
them the new tobacco. Not so long ago,
the same was said about big banks and
the whole of southern Europe.
The odd thing is that the word has
become more common even as the world
has become more investible. Thanks to
financial innovation and globalisation,
farflung assets are far easier to buy than
they used to be. Back in 1988 msci’semergingmarkets equity index included
only ten countries with a combined mar
ket capitalisation of just over $50bn. The
index now includes 24 countries with a
market value of $6.9trn. At the end of last
year the value of global investible assets
reached a record high of $179trn, accord
ing to State Street, an asset manager. That
is equivalent to 186% of world gdpin 2021,
up from 116% in 2000.
Even in his unedited report, Mr Yao did
not argue that it was impossible to hold
Chinese internet stocks. Indeed, he ad
vised global investors to remain “neutral”
on 11 of them. So what was on his mind? He
worried that the depositary receipts of
some internet firms might be delisted
from American exchanges, because China
has been reluctant to open the books of its
auditors to American regulators. This in
itself would not make them uninvestible,
because the shares of most of these com
panies can also be bought in Hong Kong,
as Mr Yao himself pointed out. But he saw
this regulatory row as the latest mani
festation of the geopolitical risks faced by
China, which became more salient afterRussia invaded Ukraine.
Because of these risks, he said, global
investors were likely to shun Chinese
internet firms over the next 6 to 12
months, however cheap they became.
During this “stage”, he argued, these
stocks could no longer be valued by
simply projecting their earnings and
cashflow. Only after foreign investors
had departed would his “valuation
frameworks” regain relevance, presum
ably because the remaining investors
(locals and China specialists) would be
less sensitive to SinoAmerican rela
tions. He recommended revisiting the
sector only when this new stage arrived.
When would that be? The answer, he
admitted, depended on “many unpre
dictable factors outside our forecast
capability”. It turns out he was right. In a
more upbeat report on May 16th he said
that the second stage had already arrived,
well ahead of schedule. Thanks to some
encouraging noises on the delisting
dispute, Mr Yao believes that geopolitical
risks have receded enough to give his
valuation framework some purchase
once again. He duly offered new, higher
price targets for 18 companies.
His editors were, then, right that
“uninvestible” was the wrong word.
“Unanalysable” would have been better,
if even uglier. It is not that Chinese in
ternet stocks could not be bought, mere
ly that they could not be valued using Mr
Yao’s preferred framework, which could
not accommodate geopolitical risk.
Unfortunately, few assets these days are
entirely free of such risks. Anyone taking
a view on commodity prices (and thus on
inflation, and therefore interest rates) is
also taking a view on war and peace. If
more investible assets are not to become
unanalysable, stockpickers may have to
invest in a broader view of the world. ButtonwoodIs China uninvestible?
Stockpickers grapple with a new geopolitical realitySome capandtrade schemes, in which
companies must buy permits for their
emissions, allow for a certain amount of
emissions to be offset. By and large, how
ever, offsets are not required by regulation.
Firms and individuals seeking to reduce
their carbon footprints choose to buy
them, meaning that the demand for offsets
is largely driven by ethical or publicrela
tions imperatives. As the war in Ukraine
began and attention turned away from cli
mate change, offset prices declined.
Another problem is that there are few
internationally agreed rules for offsets. A
report published earlier this month by Car
bon Direct, a consultancy, said that “the
voluntary carbon market largely consists
of projects of questionable quality.” A sur
plus of older and less reliable offsets hangs
over the market, depressing prices.
It is not possible to truly know what
would have happened had an offset not
been paid for. “Most projects overreport
and some don’t reduce emissions at all,”
says Barbara Haya of the University of Cali
fornia, Berkeley. “It’s really hard for people
to know what is real and what isn’t.”
Some attempts are being made to bringclarity. Proposals from the Integrity Coun
cil for Voluntary Carbon Markets, an inde
pendent committee, are expected later this
year. They are likely to emphasise the need
for “additionality”, meaning that the re
duction in emissions claimed must be a di
rect result of the offset. Paying for green
energy installation, for instance, would
not count as a genuine offset if the project
were viable without the offset payment.
Nor would a forest that was never going to
be cut down in the firstplace. Checking
that offsets meet the criterion, though, will
remain a daunting task.n