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US investment sanctions generate liquidity distortions

Updated: Feb 14, 2023

In January, Donal Trump imposed sanctions on several Chinese stocks on the grounds that they have links to the Chinese Military. This resulted in adverse liquidity flows as these stocks were dropped from key indices and US investors were effectively banned from increasing their positions and having to deal with the prospect of completely selling their holdings by the end of the year.

Liquidity distortions which result in share price deviations from fundamental values are often investment opportunities – and this is no exception. Many of the stocks on the sanction list rate well based on quant factors, have extremely strong balance sheets and are generating strong cashflows. They don’t need access to US capital markets and their business operations won’t be affected by the sanctions.

Consider, for example, China Mobile. The company’s net cash holdings currently equates to more than 40% of its market capitalisation. It has grown its revenue every year for the last 13 years and, as at the end of January, it has a trailing and forward dividend yield of more than 7%.

The Fund increased its holding in China Mobile and other similar companies which rate strongly based on the Fund’s investment process and were sold off due to the US sanctions. It may take a while for the adverse liquidity flows to dissipate, but ultimately share prices reflect company fundamentals and on a medium term perspective these companies are attractive investments.

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