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‘It should make investors lick their lips’: EM experts on China's unexplored bets

‘It should make investors lick their lips’: EM experts on China's unexplored bets

Investors who’ve recoiled from Chinese assets might have to start changing their tune as the country continues to grow at solid rates and implement reforms, according to GAM and Ashmore experts.

The MSCI China index rose more than 50% last year, but according to GAM portfolio manager Jian Shi Cortesi, equity funds investing in that market didn’t receive a lot of inflows in 2017.  It's a similar case for Chinese fixed income as most investors haven't ventured into its onshore fixed income market, Ashmore head of research Jan Dehn wrote in a March note.

‘It is [...] useful to bear in mind that global investors have not yet fully explored China’s possibilities: China still remains an underweight in many global portfolios and Chinese equities is one of the least crowded equity markets,’ Cortesi, a Citywire AAA-rated manager, wrote in a note dated March 20.

Cortesi added she expects the Chinese market to keep delivering in 2018 as key drivers such as consumption are still in place.

This means that, barring any adverse macro events, investors are likely to ramp up their China inflows in 2018 and in turn support stock prices, added Cortesi, who runs the GAM Multistock - China Evolution Equity fund.

In fixed income, most investors have stayed away because the country isn’t included in the most commonly used emerging market indices. Local issues such as regulatory instability also limit access to these bonds, Dehn wrote.

‘But change may be afoot,’ he wrote. ‘President Xi Jinping recently acquired significantly more domestic political capital, which will enable him to push forward, with renewed vigor, the Chinese economic reform agenda, including addressing the remaining obstacles to market access.’

Moreover, news dropped on March 23 that Chinese bonds denominated in renminbi would be added to the Bloomberg Barclays Global Aggregate Index starting April 2019. Once fully incorporated, the bonds will represent the fourth largest currency in the benchmark, following the US dollar, the euro and the Japanese yen.

Equity play

Cortesi wrote that as China has evolved out of its ‘old’ economy, local consumers are now chasing ‘health, wealth and happiness,’ three themes investors should keep in mind.

‘We believe that the health care sector should experience above average growth in the long term and that clean tech related stocks will be important too, due to Chinese people’s strong desire to have a cleaner environment,’ she wrote.

‘In the wealth sector, financial service companies such as insurance businesses trading at moderate valuations are also worth considering.’

Bond moves

Looking forward, Dehn said he sees Chinese bonds as a better ‘safe haven’ destination than US Treasuries due to higher returns and lower volatility.

‘China’s entry into the global fixed income benchmarks will also help to reduce the violent instability of the dollar caused by the heavy one-way traffic in and out of the greenback around bouts of risk aversion,’ Dehn wrote.

‘The prospect of better access to the Chinese government bond market should make EM bond investors lick their lips,’ he added.

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