takes centre stage
in association with
china
china takes centre stage
CHAPTER 1 The hunt for income in Asia
EURIZON PRESENCE IN CHINA
Q&A WITH STEPHEN LI JEN
CHAPTER 2 Is Asia still the best source of economic growth?
Q&A WITH SEAN DEBOW
EURIZON FUND ANALYSIS
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China’s days as a sleeping giant are long gone. The emerging market economy is causing a stir among European and US investors who want to venture off the beaten track, and rightly so. The country has come a long way. In less than 70 years, China reinvented itself and transformed from an isolated nation with hardly any diplomatic or trade relationships to one of today’s leading superpowers. A series of landmark reforms opened up investment flows, lifted hundreds of millions of people out of poverty and led to the emergence of a burgeoning middle class. Covid-19 has certainly left its mark, but the economy is well on the way to bounce back strongly. Despite occasional local pockets of coronavirus outbreaks, China remains successful at flattening the curve of infections and continues to show signs of recovery. Manufacturing is back on track and even consumer-oriented areas like cinemas, domestic travel and restaurants are on the up. Stockpickers and bondholders alike can tap into a variety of opportunities. The breadth, depth and liquidity of China’s equity market are second only to the US, and with $15tn (€12tn) in market capitalisation, the country also boasts the second largest bond market in the world. From the world’s workshop to one of its most influential money-makers, China is roaring ahead and shows no signs of slowing down. The Chinese miracle has only just begun.
CHina’s time has come
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Q&A with Stephen li Jen
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Q&A with sean debow
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Eurizon fund analysis
china takes centre stage / chapter 1
the hunt
for income
in asia
With yields low and equity dividends cut, where should investors look next?
But now China is ploughing ahead once again, buoyed by government stimulus and relentless consumer growth. Having plunged by 6.8% in the first quarter of 2020, the Chinese economy registered 4.9% growth in Q3[1]. It’s a similar story all across Asia. Although some economies, such as the Philippines, are still being buffeted by Covid tailwinds, the general picture is one of resurgence. In fact, with global dividends falling to their lowest level since 2016[2] and eurozone bond yields continuing to sputter, Asia now presents a prime opportunity for investors seeking income. And the picture will become even rosier when the hawkish Trump Administration leaves office this month. BULLISH ON EQUITIES But promise is one thing. To achieve significant returns in this era of market caution, investors need to actively root out the right opportunities within Asia. Given the region’s growing middle class, rising consumption and unparalleled technological prowess, equities may be a good place to start. That’s certainly the view of Jim McCafferty, head of Asia (ex-Japan) research at Nomura Securities, who says they are ‘an attractive asset class in the context of a low interest rate environment’. He added: ‘Stronger balance sheets in Asia, coupled with increased awareness of corporate governance reform, mean that Asian companies have strong and sustainable dividend growth. Japan has the strongest dividend growth of all developed equity markets in the past four years. This is likely to continue as companies in markets like the UK are forced to cut or terminate dividend payments in the light of straitened financial circumstances.’ This bullishness is backed by the figures. Last year, the MSCI Asia Ex Japan index outperformed both the MSCI World and the MSCI USA[3]. In November, Asian share valuations soared to an 11-year peak[4]. Dividends aren’t quite increasing at their previous rate; the long-term trend is still extremely healthy. In terms of specific opportunities, investors can find income from several specific themes, including the rise in premium consumer sectors such as education, financial services and higher-quality food and beverage. The relentless increase in internet usage across the Asia-Pacific region and the emergence of niches such as fintech, as well as the tech supply chain, which is likely to benefit from 5G mobile networks and Big Data, are all positives. The relentless rise of urbanisation and infrastructure is likely to benefit both property developers and materials producers and health and wellness can capitalise on Asia’s advances in biotech and medical device technology. OPPORTUNITIES ELSEWHERE Away from the prime equities space, bonds may provide another source of income, albeit not as quickly. Yes, yields are flatlining globally, but an environment of US currency weakness, not to mention post-Trump stability, may make Asian bonds more attractive. And after all that stimulus in 2020, we can surely expect a flurry of issuance in the months ahead. Asian default rates are usually lower than those found elsewhere in the world (although there has been a surprising spate of failures recently) and certain corners of the market appear to have been underappreciated in recent months. Indeed, Pictet Wealth Management’s Thomas Wu believes investors can still reap considerable rewards from commodity-related corporate bonds given the recovery of global demand, as well as investment-grade subordinated bank bonds, citing their attractiveness from a risk-adjusted perspective over bank senior and AT1s. Elsewhere, there are opportunities in currencies, which also appear to be benefiting (albeit slowly) from the weaker dollar, and in real estate, with occupational demand likely to remain high due to regional economic growth. Craig Ward, an Asia Pacific specialist at real estate fund manager DEKA, believes investors would be wise to focus on Singapore, as ‘demand is growing through larger tech companies while new entrants to Asia will look favourably to Singapore as Hong Kong moves through a transitional phase.’ CHINA AT THE FOREFRONT But whichever avenue they choose to take, investors should put China front and centre if they want to achieve income in the short term. Yes, there are other opportunities elsewhere. Malaysia’s economy, for example, is tipped to grow by up to 7.5% in 2021[5]; Japan has just registered its most dramatic growth in more than half a century. But Asia’s biggest economy also offers the clearest potential for investors. In 2021, the OECD believes China will account for a third of all global economic growth; the contributions of the US and Europe, by contrast, ‘will remain smaller than their weight[6]’. What’s more, we’re likely to see a different kind of growth to that witnessed in the past, focused more on quality and stability rather than growth at all cost. This will have a knock-on effect anywhere, particularly in the equities markets, which already boast a combined market cap of around $12tn. As McCafferty said: ‘China is increasingly self-reliant... [and] its economy is transitioning from industrial output to consumption. Unlike in the past, it is much less dependent on the developed world to grow its economy. This can be funded internally by the affluent consumer.’ If investors can identify the companies which will profit from this drive for self-reliance – for example, those companies involved in supplying the semi-conductor technology that facilitates China’s new 5G mobile networks – they may achieve quick returns. Both China-A and China-H shares appear undervalued at present, certainly in comparison to more fashionable equities markets, and may present mispricing opportunities. But while equities are hugely promising (and analysts expecting their bull run to continue deep into 2021) stocks aren’t the only game in town. Income-hunters could just as easily focus on China’s $15tn bond market, which has just opened itself up to foreign investors. Those who wish to join the vanguard will be able to tap into reliable government debt with yields of 3%, an attractive option in the current climate. The recent spate of infrastructure projects will create further demand for local commodities, while real estate investors will be buoyed by news that property investment is surging, as developers seek new business by slashing prices. Wherever you look, in fact, opportunity is afoot. As we approach a year since the closure of Wuhan, Beijing and its ultra-resilient economy has bounced back once again. Investors who can show the same foresight and resourcefulness will reap their own rewards.
hen the Chinese government sealed off Wuhan and 15 other cities last January, in a frantic attempt to stop the spread of Covid-19, few would have believed their shell-shocked economy would be back on its feet within a year.
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To achieve significant returns in this era of market caution, investors need to actively root out the right opportunities within Asia
We’re likely to see a different kind of growth to that witnessed in the past, focused more on quality and stability rather than growth at all cost
[1] www.hellenicshippingnews.com/chinas-economy-has-room-to-grow-more-despite-covid-19-lurking/ [2] www.cityam.com/global-dividends-start-to-make-a-tentative-recovery/ [3] investors-corner.bnpparibas-am.com/investing/asian-equities-investing-in-the-worlds-sole-growth-region/ [4] uk.reuters.com/article/asia-stocks/graphic-asias-equity-valuations-hit-11-year-high-in-november-idUSL4N2IJ2G4 [5] cutt.ly/MhF2pfu [6] www.cnbc.com/2020/12/01/world-economy-oecd-lifts-outlook-on-vaccine-progress-sees-china-driving-recovery.html
chapter 1
china takes centre stage / eurizon presence in china
China’s rise
to economic powerhouse has only just begun
In swiftly dealing with the Covid crisis, China looks set to drive global growth for years to come
Source: www.mckinsey.com/~/media/mckinsey/featured%20insights/china/ china%20digital%20consumer%20trends%20in%202019/china-digital-consumer-trends-in-2019.ashx
n a world where yields on cash and bonds have shrunk to minimal levels, growth has been ever more prized by investors. And as one of the largest growth drivers of the global economy, accounting for 28% of global GDP growth, it is no surprise that China has been a
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popular investment story. But as the Chinese economy shifts from an emphasis on foreign demand to be more domestic consumption oriented, and as new markets start to open up to foreign investors, it is important to take a closer look at the full array of asset classes available, given that they can offer growth and diversification opportunities to those with the necessary expertise. Covid-19 has put China more than ever under the spotlight, and the Beijing government’s strong measures to curb the spread of the pandemic now point the way to economic recovery: for example, in December 2020, Fitch Ratings raised its forecast for China’s GDP to 8% growth in 2021, up from the 7.7% rate it predicted in September. Drilling down beneath headline figures, the consumer growth story, and the way it is developing hand-in-hand with technological progress, especially e-commerce, is an outstanding long-term secular theme. A massive 76% of annual Chinese GDP growth has been driven by domestic consumption, a marked shift from the situation a decade ago. Innovation, particularly technological innovation, will be vital to companies that want to profit from this wave of spending. In the long term, the companies that will be able to innovate both their products and the ways they interact with their customers will be the winners. E-commerce, in particular, is vital. According to a report by McKinsey, China’s 2019 online retail sales amounted to around $1.5tn (£1tn), representing a quarter of the country’s total retail sales volume, and more than the retail sales of the 10 next largest markets in the world combined (dwarfing the US figure, which stands at just $600bn). China’s 855 million digital consumers, McKinsey states, represent one of the biggest prizes for global marketers. Another key strand of technological innovation is Made in China 2025, Beijing’s plan to become a high-tech superpower, one that is changing the global geography of innovation. The project revolves around investments in the internet, supercomputers, artificial intelligence, robotics, industrial automation, aerospace, transport and infrastructure. By the deadline, 82% of companies will have to have ultra-high-speed broadband connections. This wave of breakthroughs is definitely positive for long term economic growth prospects and will be a source of opportunities for investors for years. Beijing’s commitment to technological innovation is also demonstrated by its decision to speed up the development of 5G technology, in an attempt to increase the competitiveness of the manufacturing industry. Over one billion people are expected to be using 5G technology in China alone by 2023. This should have a dramatic effect on the mobile internet market, which will be driven by a constant growth in mobile shopping and games, the booming advertising market and the rise in e-business. To put this in context, McKinsey’s research highlights the extraordinarily voracious use of social media among Chinese consumers. The McKinsey survey shows they spend as much as 44% of their time on social media apps, the majority of which (33%) is spent on social applications such as WeChat and Weibo’s microblogging service. Another 11% of their time is spent watching, sharing and creating short videos on apps such as the immensely popular Douyin (known in the English-speaking world as TikTok) and streaming services such as Tencent Video. Increasingly, McKinsey stresses, brands are converting the awareness they generate on social media into purchases. For companies all over the world, China is perceived less and less as a low-cost sourcing destination and more of an intrinsically attractive market and a place to test new ideas. All of this is being fuelled by the consumer power of the country’s rapidly-expanding middle class. According to The Economist, the Chinese middle class made up just 8% of the population in 2010, but stands at around 59% in 2020. It is also notable that the Covid-19 pandemic does not seem to have dented the Chinese consumer’s love of shopping, and in particular online. According to figures from the Ministry of Trade, in the first six months of 2020 the entire e-commerce market sold the equivalent of $736.7bn (up 7.3% on a year-on-year basis), and 100 million new consumers made their first entrance into the digital market. At the end of the first half of the year, the growth rate for online retail sales had increased for four consecutive months, scoring +18.6% in June. But while such a rapidly-growing market clearly offers extraordinary opportunities, seeking them out is not easy. Amid such huge economic, social and demographic upheaval, local knowledge of culture and customs is vital to sift out the winners from the losers at individual company or security level. For these reasons, Eurizon’s position in China has grown over the years through a partnership with Penghua Fund Management, the opening of Eurizon Capital Asia Ltd, and a London-based, Chinese-run team (Eurizon SLJ Capital Ltd). Eurizon has been working in China since 2007 in partnership with Shenzhen-based Penghua Fund Management, one of China’s leading asset management operators. Penghua’s assets have more than quadrupled since 2007, rising from €20bn euros in 2007 to nearly €100bn today. In particular, inflows last year were exceptional, the first nine months of 2020 accounting for growth of around €12bn euros. Eurizon has been present in Hong Kong as a branch of Eurizon Capital since 2012 and as an asset management company since 2015. Eurizon Capital Asia Ltd has been established as a hub in support of Eurizon’s position in the Asian markets. While these teams account for Eurizon’s strong on-the-ground research and bottom-up investing capability, it is important to consider the big picture via macro-economic research and currency fluctuations. Eurizon SLJ Capital is a London-based asset management company, opened in 2016, that focuses on exchange rate management and macroeconomic research. The team employs a top-down discretionary approach mixed with proprietary quantitative research.
eurizon presence in china
china takes centre stage / Q&A with Stephen Li Jen
here’s a new sheriff in town. China is about to shake things up in the fixed income space. Stephen Li Jen, Eurizon Fund – Bond Aggregate RMB manager, discusses the appeal of RMB bonds, muses about hyper-active politicians and explains what China and iOS have in common.
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Uncharted territory
Eurizon SLJ CEO and co-CIO Stephen Li Jen on China’s future in the fixed income space
Stephen Li Jen - CEO, Eurizon SLJ
Why should foreign investors take a closer look at RMB bonds?
China is the second-largest bond market in the world, with $15tn in market cap. What’s really interesting is that it got so big without any foreign participation if you exclude foreign central banks. More importantly, though, RMB bonds still tend to rally when risk sells off. You don’t see that in emerging market bonds. Usually, when you have a problem in emerging markets, the currency, equities and bonds all sell off at the same time, but not in China. With the collapse of US Treasury yields and bottomed-out yields in Europe and Japan, there are very few genuine safe havens left in the world, so what RMB bonds have to offer is precious. Additionally, RMB bonds provide a yield premium of about 350 basis points, unlike other bonds with equal credit ratings. Where else can global investors earn this kind of carry with a well-behaved currency?
Our fund is occupying the safest corner of the RMB bond space, unlike other strategies, some of which are exposed to high-risk credit names. And even though we have the safest assets, we have managed to deliver superior returns, relative to the type of assets we hold. The other feature of our fund is that we concentrate on ultra-liquid names. We don’t touch any names that aren’t liquid and only hold the biggest securities with high turnover volumes. We’ve stayed away from any names that may have liquidity issues, including all local government bonds.
What sets the Bond Aggregate RMB strategy apart from other Chinese bond strategies?
Global financial and business cycles have exhibited remarkably high correlations across countries in recent decades. China alone, which has become a full WTO member in 2001, has fundamentally changed the global financial markets because of interlinkages between different parts of the world. Yet, you must keep in mind that tighter global integration works both ways. When markets performed well, we saw decade-long rallies. But when a correction or a recession happened, it was violent, deep, and extremely disruptive, not just for a single country but for the entire world. We also have to deal with hyper-active policy reactions, both from a monetary and fiscal perspective. In recent global cycles, policy makers were quick in adopting unconventional and out-sized measures to mitigate negative shocks. This has led to huge rallies in financial asset prices but also cornered much of the developed world in deflation and ever-lower interest rates. Right now, we find ourselves in a situation where monetary stimulus has exhausted its potential and fiscal policies are about to kick in. We’re in uncharted territory and will see how far governments will go to underwrite the global recovery.
With 25 years’ experience in the investment industry, you’ve been through at least two major bull and bear markets. How has that helped you navigate the current environment?
Financial repression in China is minimal these days. In my opinion, the PBOC is one of the only major central banks that isn’t engaging in money printing and extreme interest rate policies, and that has immediate implications for Chinese bond markets. I call the PBOC the ‘Bundesbank of Asia’, with logical market consequences. Concretely, RMB bonds can ‘speak up’, and Chinese investors can trade the RMB bond market based on their projections. Additionally, bonds and equities still have healthy and normal correlations, unlike in many other parts of the developed world. The 60/40 portfolio still works in China. That’s not to say that there aren’t any challenges, though. China’s financial markets are like a new car brand – their performance stats are comparable to other good cars in the world, but they haven’t proven their reliability yet. What China needs to work on are power-related issues such as transparency, regulatory and credibility.
How do you assess the current situation in the Chinese bond market, particularly the challenges and opportunities for foreign investors?
It showed us that we absolutely need to focus on the fundamental view and not get distracted by fads and fashionable trends. The renminbi is a good example. In late 2019, the renminbi was trading above seven against the US dollar and everybody was arguing that under president Trump, China had to succumb to external pressures and opt to devalue the currency. But we didn’t buy that argument. We thought it was a very fundamental misunderstanding of how Beijing thinks about the currency, so we stayed long and added to the renminbi position. We also learned how important it is to understand the Chinese side of geopolitics. I don’t think it’s well understood in the market, but the Chinese culture and history really matter in the negotiation process. I think we have an advantage because as a team of Chinese natives that have been educated in the West, we can see both sides of the story and react accordingly.
How has the markets’ rollercoaster ride affected your investment philosophy and process?
The latest plan highlights China’s focus on technology. In five years’ time, China will be well on its way to becoming a major tech leader and will no longer be a source of cheap labour for the world. The second part of the five-year plan that’s worth mentioning is China’s commitment to the environment. The country has explicit plans to be carbon neutral by 2060. That’s a huge step, considering that half of the world’s CO2 emissions come from China. It also means that China will invest heavily in the environment. The last relevant component is insourcing. China’s import content of exports is already just under 90%. This ratio will likely continue to rise in the years ahead and help the economy become the dominant exporter in the world, regardless of US policies.
What do recent developments like China’s 14th five-year plan and the US-China trade spat mean for foreign Chinese bond investors?
It’s too late for the US to isolate China as they did with the former Soviet Union. At the height of the Cold War in the early 1980s, the USSR accounted for only 8% of global GDP. For comparison, China is responsible for 20% and that number is rising. China is not the former USSR, it cannot be dealt with in the same way. I don’t accept that the technology race is a zero-sum or a negative-sum game either. It will be like the competition between iOS and Android – intense but with rapid innovations on both sides that ultimately benefit consumers. On the surface, it may appear that the US is on the offence and China on the defence. But, actually, China’s underlying capacity to produce, innovate and remain a competitive exporter puts the country on an offensive path. At the same time, the US’s savings deficit does not permit it to completely cut off its trade with China. So, the reality is exactly the other way round, the US plays defence, while China plays offense.
What about the rivalry between the US and China?
Watch the video interview
Q&A with stephen li jen
china takes centre stage / chapter 2
asia
still the best source of
economic growth
All signs point to a prosperous future in Asian markets, despite questions being raised over the region’s legitimacy as a powerhouse
There are many factors at play. A decade ago, Asia was responsible for roughly a quarter of global trade in goods. Presently, it is responsible for approximately a third. By 2040, McKinsey research indicates that Asia will be responsible for over half of the world’s GDP, and nearly 40% of global consumption. These developments have also inspired growth in Asia’s cities, with Asia now home to 21 of the world’s 30 largest cities. It has been argued that we are about to enter, or have already entered, ‘the Asian Century’. ‘Asia’s economy experienced a meteoric rise in the past 30 years and its potential for economic growth looks set to continue on both an absolute and relative basis,’ said Gregoire Sharma, fixed income fund analyst at Signia. He points to several factors behind this, including a robust corporate sector, demographics, and increased trade collaboration between Asian nations. Focusing on the former, Sharma noted that Asian firms now represent over 40% of the world’s largest 5,000 companies, almost double the total based in Europe. ‘Some sectors have been performing exceptionally well, such as financial services in China and Australia, and technology-driven sectors in China, Japan, South Korea, and increasingly India,’ he said. Demographics are worthy of greater focus. While Asia’s general share of the world’s population is not expected to rise dramatically, current trends suggest its share of the population will increase in relation to Europe’s and North America’s. ‘Companies in Asia don’t need to be exporting globally to be successful, with such a large addressable market within their own borders and their neighbors’, said Carly Moorhouse, fund research analyst at Quilter Cheviot. ‘In China, we are seeing the opposite, with an ageing population. However, if you pair this with an accelerated recognition that a good public healthcare system is paramount, and the government’s increased funding into the healthcare space, you are left with many catalysts for growth in this highly innovative sector.’ UNLIMITED POTENTIAL The rise of Asia’s middle class will also fuel growth, causing increased demand for housing and infrastructure, and expanding the market for travel, leisure, and perceived higher end goods, among other things. ‘Statisticians estimate that Asians will make up 87% of the next billion middle-class entrants,’ said Moorhouse. ‘To put this into context, China’s middle-class consumers are estimated to double to 600 million in the next 10 to 15 years, which is nearly twice the size of the entire US population.’ Asian nations are benefiting from trade collaboration too. China’s Belt and Road initiative highlights efforts to expand trade internationally and within Asia, and there is also greater cooperation and integration specifically within Asia. This is highlighted by initiatives such as Asia-Pacific Economic Cooperation and the Association of Southeast Asian Nations. Sharma added, ‘with Chinese multinationals investing across Asia, the China-driven flows of goods, services and capital will help to support deeper integration in Asia and will see trade increase significantly; a tailwind for Asia’s real GDP, which will further help reduce the poverty gap in the region.’ As an aside, the public trade dispute between China and the United States has been beneficial for Chinese trading partners within Asia. Ben Staniforth, research analyst at Redmayne Bentley, noted the outcome for Vietnam. ‘Vietnam has been identified as a key beneficiary of the US-China dispute, helping to increase demand for manufacturing in the country as wages in China continue to rise, and the traditionally protectionist Vietnamese government looks to open the country up to foreign investment,’ he said. FIRST IN, FIRST OUT There are other economic factors to consider. In terms of monetary policy, Asian nations are, in contrast to the Western world, still able to boost economies through interest rate rises. Sanjay Rijhsinghani, partner and head of portfolio management at LGT Vestra, indicated how this is advantageous for Asian economies in the financial recovery from the pandemic. ‘Asia’s starting point for interest rates was much higher coming into this downturn, and Asia therefore has considerably more monetary ammunition to stimulate the economy as the impact of these cuts are more powerful on the end consumers and businesses,’ he said. Rijhsinghani noted that the pandemic has saddled Western nations and companies with further debt. ‘On the flip side, Asia, free from the weight of the excessive debt burden hanging round their neck, looks set to emerge from this crisis in better order, with its youthful population and companies trading at attractive valuations,’ he said. There are many factors supporting Asian growth. Nonetheless, there is no case for indiscriminately investing in the region. Asia is a diverse continent, and the anchor economy of China varies considerably from other advanced Asian markets, and even more so from the emerging and frontier markets. Growth prospects vary among these nations. Research from the Asian Development Bank stated that seven nations will lead ‘the Asian Century’, naming them as China, India, Indonesia, Japan, the Republic of Korea, Thailand and Malaysia. Growth in other Asian markets may be far less attractive. Investors should also consider ESG concerns and the values of end investors. The rise of Asia will improve the living standards of billions of people, and development in the region will need to consider the environmental impact. The example of India, which imports 80% of its crude oil, highlights this. Falling oil prices could boost Indian GDP by roughly 2%. However,a reliance on fossil fuels could damage Asia considerably. For example, it has been widely reported that 19 million Bangladeshis could be displaced by rising sea levels. No region is free from these challenges, and the various factors mentioned above suggest that the Asian growth story is far from over. It seems there is a convincing argument that Asia is still the best source of economic growth.
or as long as most investors will remember, Asia has been the standout region for economic and investment growth. With favourable demographics, a burgeoning middle class, and rapidly expanding corporate and tech sectors, many believe its upward trend will continue for the foreseeable future.
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China’s middle-class consumers are estimated to double to 600 million in the next 10 to 15 years, which is nearly twice the size of the entire US population
is
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Carly Moorhouse
Asian nations are, in contrast to the Western world, still able to boost economies through interest rate rises
chapter 2
china takes centre stage / Q&A with sean debow
ean Debow is no stranger to Asia. After 25 years of experience in the region’s financial markets, the CEO at Eurizon Capital Asia and CIO on the Eurizon Fund – Equity China A knows what it takes to navigate the Chinese equity space. He shines a light on lessons learned, insights gained and the peculiarities of one of the most exciting asset classes these days.
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Full speed ahead
Eurizon’s Sean Debow believes that there is no need to press on the brakes regarding investment in the Chinese equity market
Sean Debow, CEO, Eurizon Capital Asia, CIO, Eurizon Fund – Equity China A
why should investors take a closer look at the Eurizon China strategy?
First, we can provide the experience you need to navigate and understand the different nuances of the Chinese equity market – without it, the market is at your peril. I’m fortunate that both myself and our portfolio manager, Andrew Lee, have over 20 years’ experience. China is a huge country with many sectors and having expertise like we do – in tech, consumer, financials and healthcare – really gives us an advantage and enables us to look after the needs of our clients. We know what’s happening on the ground. It certainly helps that we’ve had thousands of meetings with analysts, companies and experts. And finally, our ability to demonstrate consistency, with the Eurizon China fund having just passed its three-year anniversary.
It’s been a multi-stage process. After the outbreak occurred in Wuhan, and domestic and foreign media came to learn about this terrible situation, the Chinese market didn’t move that much. So, when the virus first emerged, the market dropped by roughly 10%. Things changed in March, when the world woke up to a global pandemic. Chinese equities were certainly not immune to that. We saw a meaningful decline in the Chinese equity market, even though it was less severe than the global market downturn. In July, everything changed. That was the ‘Chinese Covid Pivot’. The Chinese market began to rally as investors moved away from Covid-19 and focused on domestic opportunities. Today, China is the country with the fastest recovery and has proven that it’s able to cope with the challenges posed by the pandemic.
How have Chinese equities responded to the Covid crisis?
Our approach focuses on fundamental research, regardless of the level of volatility. We’re looking at structural changes in a market that is evolving very quickly. Right now, we see opportunities in several areas. Look at the Chinese middle class, for example. They want to open their financial portfolio to new instruments and that is bringing great opportunities to both insurance and domestic brokers. Another domestic sector we’re interested in is consumer staples. If anything, the lockdown demonstrated that people are striving for a higher quality of life – they don’t necessarily want more things, just better things. We also look for securities that benefit from the increasing healthcare trend.
How do you and your team go about stock selection in this volatile period? Where do you see opportunities?
Crisis is danger plus opportunity
The Chinese renminbi was a closed currency for a long time, but things are changing as the domestic economy is opening, and onshore bonds and equities are more easily available to more investors. The long-term objective is for the renminbi to become a global reserve currency. It could even be complementary to the euro and the US dollar, although that is still some way off right now. At the moment, we’re looking at Chinese reserves, which have been growing quite considerably over the last six months. Hong Kong has certainly gained importance as an offshore centre. For equity investors like us, the opportunity to be able to invest Northbound into the domestic market, and Chinese investors to be able invest Southbound through the connect exchange, has strengthened the convertibility, usage and importance of the renminbi.
What effect does the increasing use of the Renminbi and its rising value have on Chinese equities?
We don’t think that the market is overvalued or that it’s time to stop – on the contrary, we believe there’s still room to grow. First, the Chinese CSI 300 index is currently trading at roughly 17 times earnings for this year. In New York and India, that is 26 and 27 times, respectively. So, in a global context, the Chinese equity market is not expensive, even though it’s more expensive than it once was. There’s also a structural change. We always think about what the Chinese equity market was like 10, 15 years ago, when we were merely explorers of the Chinese markets. Now, you can purchase securities of Chinese companies on stock exchanges in New York, Toronto and London, not just in Hong Kong and China. As investors pay more attention to Chinese securities, particularly onshore securities, demand is rising. I also think it’s important to keep an eye on what’s going on in the IPO market. We’ve seen eye-popping, exciting IPOs take place recently, and some people may find them too extraordinary. What you mustn’t forget, though, is that these IPOs represent innovative business models that will be advertised to 1.4 billion people.
Are Chinese equities overvalued right now?
Let’s think like a Chinese philosopher for a moment. The Chinese symbol for crisis has two characters, which bring to us the attention of danger and opportunity. Put differently, crisis is danger plus opportunity. Yes, we’ve seen a crisis, we’ve seen the markets fall quite a bit. But we’ve also seen a 38% appreciation since the drop earlier in 2020. Right now, there is a lot of opportunity for reform, particularly in the backdrop of rising domestic consumption.
How does the current crisis compare to previous ones?
I’m constructive on 2021. I think that many points are lining up appropriately to make 2021 an exciting year for investors in the Chinese A-share market. I’m particularly excited about the healthy consumer demand, which is going to push a better-than-expected consumption in areas like autos, home spending and domestic travel. And in communication, we’ve got a lot of structural and positive growth coming from 5G. However, I’m keeping some powder dry on the real estate side. I think we’re going to continue to see tightening by the central government in China to avoid a bubble. That’s why we’ll hold back in that sector.
What’s your outlook for the Chinese equity market in 2021?
china takes centre stage / advertisement feature
TARGETED STRATEGIES FOR A MARKET THAT IS OPENING UP TO THE WORLD
Stephen Li Jen , CEO of Eurizon SLJ
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THE CHINESE MEDIUM-TERM PLAN China adopted the 14th Five-Year Plan, an absolute stunning policy plan that all should pay attention to, not just investors. From my point of view there are a few key components of this plans that are important to foreign investors. First, China will accelerate its efforts in the development of technology. To underpin this, it has also announced a 15-year plan on high-tech to cover the period 2020-2035, just as they did in 2005, to cover the period 2005-2020. What is different this time is that the next 15-year technology plan could be to leap forward to be the technology leader of the world. Second, China will make significant progress in improving the environment. President Xi surprised all to announce at the UN General Assembly that China would achieve carbon neutrality by 2060. Third, while for much of the past 20 years, China has been focused on the ‘External/export circle’, it will now switch its focus to developing domestic demand and engage in import substitution. The countries that have risen on the coat tails of China in the past may realize that such growth elasticizes might fade in the years ahead, as China might no longer need their goods and services. Fourth, China will continue to reform its financial sector to invite foreign investors to buy and hold Chinese assets. CHINA’S PROSPECT GROWTH AND THE RENMINBI In my opinion China looks well placed to keep growing but it is not focused on headline growth. Therefore, I’d be inclined to expect a trend growth close to around 5 percent, drifting even lower in the out-years. If, however, economic growth does hit much higher levels, Chinese yields could rise further. Thus, one potential risk is a possible sell-off in Chinese bonds if the economy continues to recover. Yields in China are already slightly above the level they were before 2020 so I’m not of the view that there are much further upside risks to yields. About the currency I think the People’s Bank of China is like the ‘Bundesbank of Asia,’ and the RMB is the D-mark of Asia. The economic fundamentals are solid in China and I’m confident that Beijing won’t do anything to unsettle the currency because they want foreigners to keep investing in China, and they want to nurture the RMB to one day become a reserve currency. THE NEW ASIAN FREE TRADE AGREEMENT RCEP: THE IMPACT ON CHINA'S ECONOMY, CURRENCY AND ON FOREIGN INVESTORS The 15-nation FTA in Asia recently signed between China and 14 other nations should be probably considered more symbolic than something that introduces huge incremental advances in freer trade. Basically, I think that the signing of the regional trade agreement cements the informal discussions, identified in three key topics. First of all, trade globalisation, at least in the unrestricted and unbalanced form it took in the past 20 years, may be over. Replacing it is ‘trade regionalisation. The EU is one such example, where Germany has heavily out-sourced to Eastern Europe, and much less so to China. Germany’s production presence in China is mainly to serve the Chinese market, not the European market. The arrangement is very different in the US, where American companies outsourced to China to re-import back into the US. This is one reason why trade with China has become such a major social and economic issue in the US but less so in Europe. This is what I mean by ‘trade regionalisation. Second, I think that China will not allow itself to be isolated even if it shifts its focus to "internal circulation", it won’t give up its export sector. Last but not least, China is reducing tariffs, and that’s good for the rest of the world considering that it has been the single most protectionist large economy in the world. As its wealth rises, it has become more confident in opening up its economy by lowering import tariffs, which are still high, relative to the tariffs of its trading partners. A MARKET OPENING TO THE WORLD The Chinese bond market is now accessible to foreign investors and we are talking about a very large market: too big to be ignored. I estimate that the Chinese fixed-income market could see 2,000 billion dollars of inflows in the medium term. The turning point happened in 2017 with the opening of “bond connect”, a Hong Kong- based platform that basically allows approved foreign funds to invest in Chinese bond markets with no limits. Considering that the RMB bonds are gradually included in the various global bond indices and the weights raised in these indices over the coming years, passive and active bond index trackers will need to gain exposure to the RMB bonds. However, now foreign investors hold just the smallest share (approximately 2.5%) of China’s huge bond market. PORTFOLIO STRATEGIES TO INVEST IN CHINA To take advantage of this attractive investment opportunity, a solid and professional team of portfolio managers are needed. Our skilled team with strong Chinese roots (all of the team members are Chinese and are fluent in Mandarin) has demonstrated capacity to grasp the primary market trends as well as China’s policy intentions and idiosyncratic traits. We manage the largest strategy in RMB-denominated bonds outside the China. The Eurizon Fund - Bond Aggregate RMB represents an attractive investment opportunity for EUR-denominated investors, as it allows access to RMB-denominated bonds either traded on the China Interbank Bond Market or in other regulated markets in People’s Republic of China, including Hong Kong. Further, we have begun to broaden our strategy in an innovative multi-asset investment fund: a portfolio with significant exposures to Chinese onshore RMB-denominated bonds blended with Chinese equities. This new product with a multi-asset approach will benefit from our team’s expertise in Chinese bonds and equities, as well as their top-down macro perspective to investment, aiming to capitalise on Chinese companies’ to generate profits. Further, such a blend of Chinese bonds and equities is aimed to achieve stable returns in the medium- and long-term from the Chinese markets through business cycles.
Source: Eurizon. There can be no assurance that these results will be achieved or that there will be a return on capital. This marketing communication is for professional investors only in Austria (AT), Belgium (BE), Denmark (DK), Finland (FI), France (FR), Germany (DE), Italy (IT), Luxembourg (LU), Netherlands (NL), Norway (NO), Portugal (PT), Spain (ES), Sweden (SE) and to professional Investors in Switzerland (CH). Not intended for retail investors or any US person. The information contained in this document is for information purposes only, it is not be considered as an offer or a solicitation Fund: Eurizon Fund (UCITS – FCP – Luxembourg). Sub-Fund : Eurizon Fund – Bond Aggregate RMB. Sub-Fund launch: 17/02/2017. Reference currency: Euro. Benchmark: Bloomberg Barclays China Aggregate Bond Index®. For designing portfolio, measuring performance and calculating performance fee. Ongoing charge: 0.57% / Entry and exit charge: none/Management fees: 0.40%. Please refer to the Prospectus and KIID for performance charge information. ISIN : LU1529955392 (Class Unit : Z EUR Accumulation). Fund information www.eurizoncapital.com. Risks of the Sub-fund: SRRI Category 4 due to the exposure of the Sub-Fund to RMB denominated instruments issued by countries and companies. Other risks not taken into account in the SRRI include: counterparty risk, credit risk, liquidity risk and geopolitical risk. For more information about the risks as well as the fees and conditions, you must read the Key Investor Information Document (KIID) and the Prospectus (please refer in particular to section "1.2. Investment Objective and Risks Factors"). Please see Important Information on page 22.
china takes centre stage / funds analysis
China’s middle class
begins to flex its muscles
The Chinese government’s determination to transition to a consumer-driven economy is well under way
Source: www.msci.com/www/blog-posts/china-a-shares-what-have-we/02164045217
hile the Asia growth story is compelling, it is important to understand the full range of investment opportunities available in emerging markets. Many of the asset classes available are relatively underexplored by developed market investors. In
addition to the growth prospects, emerging market investments offer the potential to bring important diversification to a portfolio. The focus of China’s economic growth has shifted from industrial production to its rapidly-expanding middle class consumers. This is a transition fully supported by China’s leadership, as the government is determined to make a structural transition to a long-term consumption-driven and domestic economy. And one of the most effective ways to invest in companies that benefit from this growth dynamic is via the A-share market. The China A-share equity market has low correlation to global markets, is under-researched and is less efficient than developed markets. This is partly because index providers have, despite recent increases, only included the Chinese equity market as a relatively small component of benchmarks. As of August 2020, the overall weight of China in the MSCI Emerging Markets index stood at around 41%, while A-shares accounted for just 5.1%. According to Zhen Wei, executive director at MSCI Research, since A-shares’ expanded inclusion in the global index, China equities have outperformed both emerging market and global equities. ‘From a performance perspective, the MSCI China A index returned 28.9% from 31 May 2018 to 31 August 2020, compared to the MSCI Emerging Markets index and MSCI World index returns of 4.35% and 22.2%, respectively, during the same period,’ Wei said. A-shares also provided risk diversification, he noted. In the view of Eurizon Capital Asia’s Sean Debow, even this A-share index inclusion increase does not provide an adequate representation of the real growth opportunities in China. The most desirable approach to capture performance in the Chinese equity markets is by utilizing a research-intensive, stock picking approach, Debow noted. ‘China’s equity markets have many high-quality companies with dynamic growth prospects, making them ideal for quality growth investors.’ Debow’s team analyses hundreds of equities a year, starting with a macro assessment, followed by stock-specific analysis focused on companies with excellent fundamentals and a reasonable valuation. This is followed by meetings with company management and industry analysis. Debow contends that on-the-ground research is vital to identify attractive investment opportunities in China. But Chinese equities are not the only investment opportunity that is under-explored by international investors. In a world where developed market bond yields have collapsed, Chinese local currency bonds offer an attractive profile of yield and diversification. Renminbi bonds can be seen as a safe-haven asset: historically, they reliably outperform during risk-off scenarios. They exhibit emerging market-like returns, but with developed market-like risk dynamics. As a result, they can improve both the return and the Sharpe ratio of global fixed income portfolios. The Eurizon Fund - Bond Aggregate RMB offers exposure to the world’s second-largest bond market. ‘The fund invests in a diversified set of renminbi-denominated debt instruments traded on the China Interbank Bond Market or in other regulated markets in China and Hong Kong,’ explains Stephen Li Jen, the fund’s manager. The fund’s process uses a top-down macro-economics-based approach. ‘This relies on our understanding of the peculiarities of the Chinese economy and its increasing relevance in determining global economic and political trends,’ Jen says. The analysis focuses on three main pillars: macroeconomics, policies and markets. This approach is augmented with fundamental, bottom-up analysis that examines local industry, as well as corporate specifics and fundamentals along with a discretionary investment style, he adds. ‘For China, in practice, this means not only monitoring the official data, but also constantly cross-checking with growth proxies to form a view on the veracity of the official data,’ he points out. ‘It’s vital to understand the structural features of the Chinese economy, as well as Beijing’s thinking about the ranking between structural reforms, fiscal and monetary stimulus,’ he says. While both A-shares and Chinese local-currency debt offer advantages to investors, combining the two creates a multi-asset strategy that offers potential for long-term growth as well as stable yields in the medium to long term. The multi-asset strategy takes advantage of the firm’s expertise in both bonds and equities, as well as its macro-economic views to produce a balanced strategy promising superior risk-adjusted returns.
China’s equity markets have many high-quality companies with dynamic growth prospects, making them ideal for quality growth investors
Sean Debow, CEO, Eurizon Capital Asia
eurizon fund analysis
china takes centre stage / disclaimers
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IMPORTANT INFORMATION Marketing communication issued by Eurizon Capital S.A. (the “Management Company”) and relates to Eurizon Fund (the “Fund”) and its Sub-Fund, Eurizon – Bond Aggregate RMB (the “Sub-Fund”), organized as a mutual investment fund in transferable securities or a “Fonds Commun de Placement” (FCP). Eurizon SLJ Capital LTD, a private limited company incorporated in England and Wales with registered number 9775525, having its registered office at 90 Queen Street 2nd Floor London, EC4N 1SA, United Kingdom, is the Investment Manager of the Sub-Fund.In case this documentation is distributed to clients or potential clients of Luxembourg, Germany, Spain, Switzerland below information should be noted: Luxembourg: Custodian bank and paying agent: State Street Bank International GMBH – Luxembourg Branch , 49 Avenue J.F Kennedy, L-1855, Luxembourg. Germany: The net asset value of these Units is published daily on www.fundinfo.com. Spain: Eurizon Fund is registered for distribution with Comisión Nacional del Mercado de Valores (CNMV) under number 667. The Fund documents are also available in free of charge at the CNMV. Switzerland: The Units are registered with the Swiss Financial Market Supervisory Authority (FINMA). This promotional document is intended only for Swiss professional investors as defined under Article 4 of the Federal Act on Financial Services (FINSA). Swiss Fund documents available at the Swiss representative agent: ACOLIN Fund, Services AG, Affolternstrasse 56, CH-8050 Zurich. Paying agent in Switzerland: State Street Bank International GmbH, Munich, Zurich Branch, 19 Beethovenstrasse. In respect of the units distributed in or from Switzerland, the place of performance and jurisdiction is at the registered office of the Swiss representative. Daily publication of the prices of subscription and redemption and/or net asset values (with the mention “excluding commissions”) of the Units distributed in Switzerland: www.fundinfo.com There is no guarantee that the investment objective will be reached or that there will be a return on investment. The Sub-Fund is not guaranteed. Before taking any investment decision, you must read the Prospectus, the Key Investor Information Document (the “KIID”), and particularly the section related to the risks, costs and tax impacts. These documents may be obtained at any time, free of charge at the Management Company’s website: www.eurizoncapital.com. The net asset value of this Unit is published daily on www.fundinfo.com. The information and opinions contained herein are subject to change.
disclaimers