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Global X China Innovator Active ETF Quarterly Review | Second Quarter Shines Light on Innovation

Innovation themes in solar, electric vehicles, software and automation came to light in the second quarter of 2021. However, online businesses became a major detractor as the Chinese government implemented regulatory changes in its latest industry-targeted crackdown.

China Reins in Tech Firms

China’s elevated regulation roll out continued to impact various industries, from education to technology. The latest crackdown on tutoring businesses, along with labor welfare issues for food delivery giant Meituan, spooked investors. China’s State Administration for Market Regulation’s (SAMR’s) decision to target internet businesses comes on the back of an unprecedented pace of regulatory tightening – as part of a broader drive to regulate China’s technology sector, which has seen unparalleled growth over the last few years. Against a regulatory-driven backdrop, Chinese companies are typically proactive when adhering to environmental, social and governance (ESG) measures. That said, some businesses expand so quickly that they face challenges meeting ESG best practices.

While the industry-wide impact led to a fall in sentiment towards internet stocks, the government continues to show its commitment to support new burgeoning industries such as electric vehicles (EVs), artificial intelligence (AI), solar and software.

The Electric Vehicle Revolution is Already Here

Global EV sales increased across the globe for Q2, in part due to a gradual pivot from traditional internal combustion engine (ICE) models, with total EV sales exceeding 10% over the same quarter.1 The figures we’ve seen emerge from the EV market were considered almost unimaginable a few years ago, and suggests to us that the EV revolution has already arrived.

As demand rises for EVs, so does the demand for the most crucial part of EVs – the battery. Leaders in the China battery supply chain, such as Contemporary Amperex Technology (CATL), BYD and Wuxi Lead Intelligent Equipment could continue their trajectory as long-term demand continues.

Portfolio Positioning

Over the quarter we focused on a growth theme, while remaining conservative about our exposure to more conventional businesses. Burgeoning industries in EVs, AI, solar and software continue to drive the supportive growth themes we’ve seen. While some investors may traditionally consider consumer businesses as a growth driver, there is no shortage of candidates in this sector.

By contrast, we have a meaningful exposure to information technology (IT) and the healthcare sector, as companies in this sector are likely to embrace new technology and meet societal demands, such building out an effective digital infrastructure for better health care in China.

We also have a sizable exposure to industrial sector. China’s global competitiveness and capabilities in manufacturing and engineering suggests to us these could become growth drivers for the sector.

Recently we added heavier weightings in biotech companies Jiangsu Hengrui Medicine and Innovent, which underperformed year to date.2 We reduced in solar names Longi New Energy and Xinyi Solar and EV company BYD, whose shares rallied over the second quarter. The change in our portfolio does not necessarily mean we’ve changed our views on those companies as they will remain as leaders in their respective sectors. We may be ready to re-enter these stocks if an opportunity presents itself i.e. through share pull backs.

Phil S. LEE
Head of AP Research

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1 JP Morgan, July 2021.
2 Bloomberg, July 2021.

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