WHY THESE MANAGERS ARE BACKING CHINA
By Jennifer Hill
Wealth managers are becoming increasingly attracted to China’s massive stock market for myriad reasons.
Psigma Investment Management has 8.5% of the equity portion of a balanced client’s portfolio invested in China, achieved through a mix of Asian, emerging market and environmental funds.
Harpsden Wealth Management’s main model has more than 4% in China through Asian funds, having increased this incrementally since mid-2018. It is currently considering several options for Chinese equity funds and awaiting an attractive entry point.
Many of Quilter Cheviot’s clients are overweight China through emerging market and Asian funds. They also have some exposure to China-specific funds, which the wealth manager expects to increase over the next three to five years.
So, why are managers backing? We spoke to four of them:
Ravenscroft – Economic strength
Ravenscroft believes China will emerge from the Covid-19 pandemic in a relatively stronger position, with economic growth likely to exceed 8% in 2021.
‘China’s monetary and fiscal positions are also much stronger than most other major economies and it has plenty of room to ease policy further if needed as it seeks to re-balance the economy towards consumption and investment,’ said Kevin Boscher, Ravenscroft’s chief investment officer.
‘It’s the only major economy with positive interest rates and relatively high growth. The People’s Bank of China is vigilant about asset bubbles, the government is keen to maintain fiscal surpluses, the shadow banking and property sectors appear to be under control and inflation remains low.’
He points to successful private businesses rapidly altering the structure of an equity market once dominated by state-owned enterprises.
‘It’s true that the West is turning more hostile towards China as it emerges as a major economic, military and technology threat to the US,’ added Boscher. ‘However, we need to remember that China’s economic boom started in the early 1990s when international hostility was running high due to the 1989 Tiananmen Square incident.
‘It is likely that the current Chinese leaders will make its economy more open to foreign business and investment, which is bullish for the economy, currency and equity prices over the longer run.’
Harpsden – Size and
breadth of the market
Harpsden is backing China to gain access to one of the biggest, most diverse markets in the world. China boasts the second largest stock market by market capitalisation behind the US and a strong initial public offering pipeline for 2021 looks set to further strength its position.
Chinese equities remain under-represented in global investors’ portfolios but represent a strategic asset for long-term allocation, according to Harpsden research analyst Jack Byerley.
‘Below the surface of well-known internet and technology giants lies a plethora of opportunities supported by China’s push for self-sufficiency,’ he said. ‘This has been accelerated by US aggression on trade and intellectual property, giving the Chinese no option but to innovate and create a fertile environment for entrepreneurial small and mid-cap companies.
‘The scale of the market is vast with around 4,000 A-Shares and 1,600 H-Shares. A-Shares are particularly underrepresented in major indices, providing a structural tailwind as inclusion improves.’
According to Matthews Asia, nearly 60% of these companies have no sell-side analyst coverage at all.
‘This breeds inefficiencies which are exacerbated by retail investors who account for a significant proportion of daily trading volume, particularly in the A-Share market,’ said Byerley. ‘Skilled active management should thrive in this type of market.’
He favours well-resourced teams that conduct on-the-ground research to ‘uncover and profit from these underappreciated opportunities’.
Quilter Cheviot – Rise
of domestic consumer
While the export of cheap manufactured goods drove China’s past growth, the country’s emerging middle-class consumers will fuel future growth. The rise of a middle class with growing disposable incomes is one of the strongest structural drivers of growth in China, according to Quilter Cheviot, whose portfolios have a bias towards Chinese consumption.
The size of the population with more than $10,000 annual disposable income is expected to grow from 280 million to 680 million by 2030.
‘The growth of the middle class has already been extraordinary to watch, but over the next 10 to 15 years China’s middle-class consumers are estimated to double to nearly twice the size of the entire US population,’ said fund analyst Carly Moorhouse.
‘A ballooning middle class with more disposable income means more money being spent on domestic luxury consumer goods, travel and hospitality sectors, and less reliance on exports.’
While China’s transition to a service-based economy is already paying dividends, the structural growth drivers that go hand in hand with a rising middle class, increasing wealth and rapid urbanisation are not the only positives that Moorhouse sees for China.
‘Electric vehicles, robotics, artificial intelligence, biotech and renewable energy are just some of the many sectors where we’re seeing increased technological innovation that will power growth for years to come,’ she added.
Psigma – China’s drive for carbon neutrality by 2060
The race for carbon neutrality is on. Last September, China announced its intention to hit peak emissions by 2030 and become carbon neutral by 2060. ‘This bold announcement has the potential to be the most impactful yet for tackling climate change given that China is the biggest emitter globally with around 30% of total emissions,’ said Martin Ward, head of fund research at Psigma.
China’s 14th five-year plan, unveiled in March, introduced the idea of a CO2 emissions cap, though did not go so far as to set one. However, a national carbon trading scheme is expected to be rolled out this year, starting with power generators and gradually including other high emitting industries.
China’s efforts to tackle climate change stands to supercharge the revenues of companies exposed to a decarbonising economy. ‘China is a key player in environmental solutions and their supply chains,’ said Ward. ‘This shift in policy will require a massive reconfiguration of the Chinese economy to move it onto a more sustainable path.’
The strength of Chinese companies in this area is reflected in large allocations to China among some environmental funds. Xinyi Solar, which makes glass for solar panels, Xinjiang Goldwind, a wind turbine manufacturer, and Wuxi Lead Intelligent Equipment, a technology company in the electric vehicle battery supply chain, are among potential beneficiaries.
Martin Ward
Psigma Investment Management
Carly Moorhouse
Quilter Cheviot
Jack Byerley
Harpsden Wealth Management
Kevin Boscher
Ravenscroft
Why these managers are backing China
Q&A
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WHY THESE MANAGERS ARE BACKING CHINA
Why these managers
are backing China
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Jack Byerley
Harpsden Wealth Management
With Anthony Wong, Senior Portfolio Manager, Allianz Global Investors
WHY I’M BACKING CHINA
Jennifer Hill
As the China economy was more resilient over the last year, corporate earnings were also less impacted than the rest of the world. Conversely, as the global economy recovers during this year, then the earnings rebound in the rest of the world is also likely to be sharper. Our expectations in China are for 10 – 15% earnings growth in 2021. Looking beyond the low base comparison year-on-year, however, we believe earnings prospects in China should be sustainably higher than much of the rest of the world.
Q
How do you see the earnings prospects for China vs the rest of the world?
The development of China’s capital markets and their integration into the global financial system are likely to be a defining structural shift in coming decades. We are at the early stage of a long journey where China will become increasingly represented in investor portfolios. This trend is already underway in equities and other areas such as fixed income and currency allocations should follow.
For equities, the much-improved accessibility of China’s domestic A-Share markets and subsequent inclusion in global benchmarks have been key factors. But still there is a large mismatch with the size and scale of China’s economy and markets. China equities are the second largest asset class globally by market capitalisation (around $19tn) after the US1. But they only represent 5% of the MSCI AC World Index, compared to 57% for US equities2.
Do you think China is under-represented in investors’ portfolios?
A key trend in recent years has been the rise of domestic brands at the expense of global companies. This is a result of improvements in product quality and service. As an example, in 2010 only 10% of smartphones sold in China were domestic brands, now this is close to 90%. We see this ‘import substitution’ trend being repeated across numerous areas of the economy. As a result, a broad range of sectors should see sustained growth from the rise of the domestic middle class in China – these include domestic tourism, entertainment, staples businesses such as cosmetics, white liquor and so on.
What sectors will benefit from the rise of the domestic middle class?
The conventional orthodoxy has previously been that ‘America does innovation and China does clones’. However, it is increasingly clear that China’s (and Asia’s) future growth trajectory will be powered by innovation in technology, data and science. Indeed, if data is the new raw material driving companies in the same way that oil did previously, then China has a significant competitive advantage. In the next five years, almost half the world’s data is estimated to be created in Asia, the majority in China, due to the region’s rapid adoption of new technologies. And this goes someway to explaining why China has been investing so heavily in areas such as artificial intelligence.
This expertise will play a vital role in providing solutions to pressing domestic and global challenges. A key area, for example, is fighting climate change. China has announced a ‘net zero’ carbon emissions target for 2060. This sounds like a long way away but is already having a significant impact, leading to opportunities for equity investors.
What are the main areas of innovation in the Chinese economy?
Two key areas are electric vehicles (EV) and renewable energy. China is the largest market for EVs globally. It is estimated there will be 5 million EVs in China by 2025. In fact, almost all innovation in EV batteries is led by Asian companies, including major China beneficiaries.
China is already a world leader in renewable energy, especially areas such as solar, where many years of research and development have led to a significant technology edge. Over the last 10 years the cost of solar energy has fallen by 90% due to advanced technology and manufacturing cost advantages. As a result, in many parts of China the cost of producing solar energy is now lower than fossil fuels.
What are some interesting beneficiaries of the carbon neutral by 2060 pledge?
China A-Shares represent around 70% of the China equity opportunity set in terms of market capitalisation. It is a deep, dynamic and diverse asset class. And often A-Share companies represent the most direct way to gain access to the China growth story. Most investors have historically had limited exposure to A shares because they were previously only accessible through cumbersome quota systems. The launch of Stock Connect has changed this. Over the last five years or so there has been cumulative net buying of more than £200bn of China A-Shares by foreign investors.
Are A-Shares still a relatively under-explored area among foreign investors?
Corporate governance has been, and remains, a key risk factor when investing in China. Having said that, there are encouraging signs. This includes the growing number of employee share ownership schemes, which should lead to a better alignment of interest between company management and shareholders. Overall, our experience is that most companies are becoming more transparent and willing to engage on issues around environmental, social and corporate governance (ESG) factors, especially when their dialogue is with more institutional and longer-term shareholders.
Is corporate governance improving in China?
We think it is a matter of when, not it, there is further foreign participation. A key catalyst will be further increases in China weightings in key benchmarks. Although the timing of this is unclear, there is significant scope for increases given that, for example, China A-Shares currently only have an inclusion factor of 20% in the MSCI indexes. At 100% inclusion factor, China equity weightings would be meaningfully higher than current benchmark levels and may even lead investors to consider China as a standalone asset class for portfolio construction purposes.
What are the prospects for further foreign investor participation in the market?
The main driver of China equity performance is still likely to be retail, domestic investors who dominate daily market turnover and are therefore the key price setters. However, greater index inclusion will very likely lead to further foreign investor flows. And this in turn should lead to more structural benefits such as a stronger market framework and ongoing improvements in areas such as ESG as the process of market institutionalisation progresses.
Will greater index inclusion for Chinese equities provide a tailwind?
To learn more about the China story, and to read our latest investment insights, please click here
1 Source: Shenzhen Stock Exchange, Shanghai Stock Exchange, Hong Kong Stock Exchange, Bloomberg, Allianz Global Investors, as at 31/12/2020.
2 Source: Wind, Allianz Global Investors, as at January 2021.
For professional investors only. Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. Past performance is not a reliable indicator of future results. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer companies at the time of publication. This is a marketing communication issued by Allianz Global Investors GmbH, www.allianzgi.com, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, 60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by BaFIN (www.bafin.de). Allianz Global Investors GmbH has established a branch in the United Kingdom, Allianz Global Investors GmbH, UK branch, 199 Bishopsgate, London, EC2M 3TY, www.allianzglobalinvestors.co.uk, deemed authorised and regulated by the Financial Conduct Authority. Details of the Temporary Permissions Regime, which allows EEA-based firms to operate in the UK for a limited period while seeking full authorisation, are available on the Financial Conduct Authority’s website (www.fca.org.uk). Details about the extent of our regulation by the Financial Conduct Authority are available from us on request. AdMaster: 1614400
Anthony Wong
Senior Portfolio Manager, Allianz Global Investors
&A
Why these managers are backing China
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Ravenscroft – Economic strength
Wealth managers are becoming increasingly attracted to China’s massive stock market for myriad reasons.
Psigma Investment Management has 8.5% of the equity portion of a balanced client’s portfolio invested in China, achieved through a mix of Asian, emerging market and environmental funds.
Harpsden Wealth Management’s main model has more than 4% in China through Asian funds, having increased this incrementally since mid-2018. It is currently considering several options for Chinese equity funds and awaiting an attractive entry point.
Many of Quilter Cheviot’s clients are overweight China through emerging market and Asian funds. They also have some exposure to China-specific funds, which the wealth manager expects to increase over the next three to five years.
So, why are managers backing? We spoke to four of them:
Ravenscroft believes China will emerge from the Covid-19 pandemic in a relatively stronger position, with economic growth likely to exceed 8% in 2021.
‘China’s monetary and fiscal positions are also much stronger than most other major economies and it has plenty of room to ease policy further if needed as it seeks to re-balance the economy towards consumption and investment,’ said Kevin Boscher, Ravenscroft’s chief investment officer.
‘It’s the only major economy with positive interest rates and relatively high growth. The People’s Bank of China is vigilant about asset bubbles, the government is keen to maintain fiscal surpluses, the shadow banking and property sectors appear to be under control and inflation remains low.’
He points to successful private businesses rapidly altering the structure of an equity market once dominated by state-owned enterprises.
‘It’s true that the West is turning more hostile towards China as it emerges as a major economic, military and technology threat to the US,’ added Boscher. ‘However, we need to remember that China’s economic boom started in the early 1990s when international hostility was running high due to the 1989 Tiananmen Square incident.
‘It is likely that the current Chinese leaders will make its economy more open to foreign business and investment, which is bullish for the economy, currency and equity prices over the longer run.’
Harpsden – Size and
breadth of the market
Harpsden is backing China to gain access to one of the biggest, most diverse markets in the world. China boasts the second largest stock market by market capitalisation behind the US and a strong initial public offering pipeline for 2021 looks set to further strength its position.
Chinese equities remain under-represented in global investors’ portfolios but represent a strategic asset for long-term allocation, according to Harpsden research analyst Jack Byerley.
‘Below the surface of well-known internet and technology giants lies a plethora of opportunities supported by China’s push for self-sufficiency,’ he said. ‘This has been accelerated by US aggression on trade and intellectual property, giving the Chinese no option but to innovate and create a fertile environment for entrepreneurial small and mid-cap companies.
‘The scale of the market is vast with around 4,000 A-Shares and 1,600 H-Shares. A-Shares are particularly underrepresented in major indices, providing a structural tailwind as inclusion improves.’
According to Matthews Asia, nearly 60% of these companies have no sell-side analyst coverage at all.
‘This breeds inefficiencies which are exacerbated by retail investors who account for a significant proportion of daily trading volume, particularly in the A-Share market,’ said Byerley. ‘Skilled active management should thrive in this type of market.’
He favours well-resourced teams that conduct on-the-ground research to ‘uncover and profit from these underappreciated opportunities’.
Quilter Cheviot – Rise
of domestic consumer
While the export of cheap manufactured goods drove China’s past growth, the country’s emerging middle-class consumers will fuel future growth. The rise of a middle class with growing disposable incomes is one of the strongest structural drivers of growth in China, according to Quilter Cheviot, whose portfolios have a bias towards Chinese consumption.
The size of the population with more than $10,000 annual disposable income is expected to grow from 280 million to 680 million by 2030.
‘The growth of the middle class has already been extraordinary to watch, but over the next 10 to 15 years China’s middle-class consumers are estimated to double to nearly twice the size of the entire US population,’ said fund analyst Carly Moorhouse.
‘A ballooning middle class with more disposable income means more money being spent on domestic luxury consumer goods, travel and hospitality sectors, and less reliance on exports.’
While China’s transition to a service-based economy is already paying dividends, the structural growth drivers that go hand in hand with a rising middle class, increasing wealth and rapid urbanisation are not the only positives that Moorhouse sees for China.
‘Electric vehicles, robotics, artificial intelligence, biotech and renewable energy are just some of the many sectors where we’re seeing increased technological innovation that will power growth for years to come,’ she added.
Psigma – China’s drive for carbon neutrality by 2060
Carly Moorhouse
Quilter Cheviot
Kevin Boscher
Ravenscroft
The race for carbon neutrality is on. Last September, China announced its intention to hit peak emissions by 2030 and become carbon neutral by 2060. ‘This bold announcement has the potential to be the most impactful yet for tackling climate change given that China is the biggest emitter globally with around 30% of total emissions,’ said Martin Ward, head of fund research at Psigma.
China’s 14th five-year plan, unveiled in March, introduced the idea of a CO2 emissions cap, though did not go so far as to set one. However, a national carbon trading scheme is expected to be rolled out this year, starting with power generators and gradually including other high emitting industries.
China’s efforts to tackle climate change stands to supercharge the revenues of companies exposed to a decarbonising economy. ‘China is a key player in environmental solutions and their supply chains,’ said Ward. ‘This shift in policy will require a massive reconfiguration of the Chinese economy to move it onto a more sustainable path.’
The strength of Chinese companies in this area is reflected in large allocations to China among some environmental funds. Xinyi Solar, which makes glass for solar panels, Xinjiang Goldwind, a wind turbine manufacturer, and Wuxi Lead Intelligent Equipment, a technology company in the electric vehicle battery supply chain, are among potential beneficiaries.
Jack Byerley
Harpsden Wealth Management
Martin Ward
Psigma Investment Management
Q
&A
the global economy recovers during this year, then the earnings rebound in the rest of the world is also likely to be sharper. Our expectations in China are for 10 – 15% earnings growth in 2021. Looking beyond the low base comparison year-on-year, however, we believe earnings prospects in China should be sustainably higher than much of the rest of the world.
Why these managers
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