Chinese equities and precious metal ETFs were the biggest losers of the second quarter as the much-anticipated great reopening underwhelmed.
The impressive start to the year for China – marked by both performance and flows – experienced a turnaround in Q2 in the face of headwinds including sluggish factory output and concerns it is being left behind in the artificial intelligence (AI) arms race.
The outlook for investors in Chinese equities does not look like improving anytime soon, with China’s Caixin purchasing managers’ index (PMI) – an important indicator of economic health for manufacturing and service sectors – coming out at 53.9 for June, far below the 56.2 expected and 57.1 in May.
“Given it is above 50, it still indicates expansion, but growth has slowed rapidly,” Susannah Streeter, head of money and markets at Hargreaves Lansdown, said.
“There was an improvement in business sentiment, perhaps indicating expectations that authorities will move again to try and stimulate domestic demand as it becomes tougher to sell overseas given the cost-of-living crisis in key markets.”
Meanwhile, precious metals also struggled in Q2, with exchange traded-products (ETPs) tracking rhodium, palladium and silver also among the worst-performing strategies.
China ETFs tank
The headwinds facing China weighed on all aspects of the ETF market over the past three months and leading the way was the Global X China Biotech UCITS ETF (CBI0), which recorded losses of -14.4%.
It comes on the news that China’s $220bn biotech initiative is struggling to take off, with an mRNA vaccine approved for the first time this year. This was backed up by the KraneShares MSCI All China Health Care Index UCITS ETF, which fell 13.3%.
China tech also took a beating, as the country struggles to keep up with the US in its development of AI and it continued scrutiny on its mega-cap tech stocks, despite some of China’s internet firms seeing profits leap in May.
As a result, the KraneShares CSI China Internet UCITS ETF (KWEB) dropped 13.9% while the KraneShares ICBCCS SSE Star Market 50 Index UCITS ETF (KSTR) returned -11.6%.
Precious metals lose shine
Precious metals such as rhodium and palladium have struggled over the quarter due to reduced car manufacturing and the increasing market share of electric vehicles.
The two commodities are used in the construction of catalytic converters – the device used to covert an engine’s toxic gas into less toxic pollutants – but less output has weighed on demand.
The Xtrackers Physical Rhodium ETC (XRH0) plummeted 29.5% and was the worst-performing ETP in the three months to the end of June.
Meanwhile, the WisdomTree Physical Palladium (PPDX), the Invesco Physical Palladium (SPAP) and the iShares Physical Palladium (SPDM) all returned -15.4%, respectively.
The metal is nearly 30% down year to date and the broad economic weakness of markets threatens to take it down further.
