June 3, 2018
In an emerging trade war between China and the U.S., market volatility and rising interest rates aren’t fazing Asian investors and asset managers.
Panelists at Bloomberg’s Buy-Side Forum in Hong Kong in April made a case for investing in emerging markets and North Asia, particularly China, over the next 12 months. Conference attendees indicated that their perspective on investing in the region is changing as well, with 40% saying they are “more likely” to invest in emerging markets or North Asia in the next 12 months.
While the previous landscape made it relatively difficult to invest, asset managers identified three factors that are making China more attractive to investors. First valuations, which they said are more compelling than the U.S. Second, a high likelihood of significant earnings upgrades. Lastly, that regulatory changes have made it easier to access to China’s capital markets.
Valuation opportunities in domestic-driven sectors
Within the region, China is looming large on investors’ screens. After two decades of fast-paced growth, not all sectors in the Chinese capital markets are cheap anymore, according to Angus Hui, head of Asian credit and EM credit, Asia fixed income at Schroders Investment Management. But he does see some pockets of value amid concerns about an escalating trade war and the shift from quantitative easing to normalization. One of the more interesting areas, he said, is Chinese property credits issued in USD, which has seen a shakeup because of Chinese liquidity tightening. Although there are some poor-quality real estate companies that they would avoid, there are also opportunities from solid credits with yield of 5% to 7%.
Despite political threats of a trade war with the U.S., Hui said he was not concerned about impact to Chinese valuations. The Chinese economy is largely driven by domestic demand, not exports, he noted. Moreover, most investors into China are domestic focused, investing in commodities, financials, domestic-driven industrial companies, real estate and property developers – industries that are relatively cushioned from U.S. trade.
China’s GDP growth driven by domestic demand
Opportunities in the bond and credit markets
In the credit market, Hui noted that most investors are focused on government bonds and policy banks but the market is less efficient in corporate credits. The interesting opportunity with China’s bond market, Hui said, is the opportunity for risk pricing. Previously, good and bad credit traded at a difference of 10 basis points. Now there are situations where the spread is 400 to 500 basis points or 100 to 200 basis points differential within the same ratings bucket. That makes for some interesting investment opportunities for active managers, particularly when credit ratings may not be the best measure of credit quality, he said.
Poll results showed that 40% of attendees are not planning to invest in the local China bond market. This is a bit surprising when considering the recent rally in Chinese bonds. Chinese bonds have been some of the top performers so far this year, among 70 markets in the Bloomberg Barclays Global Aggregate + China index, calculated in dollars. Chinese bonds are also increasingly important as a diversifier as China continues to open up its $12 trillion bond market, the world’s third largest, to foreign investors.
One possible factor contributing to the Chinese bond under-representation could be the difficulty of getting reliable information, making it harder to invest passively. This is changing quickly though. Bloomberg recently added Chinese RMB-denominated government and policy bank securities to the Bloomberg Barclays Global Aggregate Index.
Putting geopolitical risks in context
While panelists and conference attendees were upbeat on investing in the region, geopolitical risks loomed large. Attendees cited geopolitical risks impacting investments as the biggest challenge to the fund industry over the next 12 months.
Maldonado said that while he does not discount the geopolitical risks, he also doesn’t think it should be a primary concern.
As history has shown that the impact of such events is much less than investors fear around the time of the event, Maldonado emphasized that the focus now on fundamentals is what really matters, coupled with strong, globally synchronized growth.
As China’s capital markets continue to open up to foreign investors, perspectives about investing in China are changing. With the right tools and information, there are opportunities in both equities and the credit market.
