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FSN Hong Kong 2022 – Why fund selectors are eyeing sustainability and small caps in China

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Despite short-term headwinds for China’s economy, sustainability and small caps are two themes in the world’s second largest economy that should generate outperformance for private bank clients in the coming years, according to two of Asia-Pacific’s leading fund selectors.

Credit Suisse and BNP Paribas Wealth Management both hold a neutral allocation to China. Yet, at Asian Private Banker‘s 9th Fund Selection Nexus in Hong Kong, the two private banks outlined the reasons why clients should stay invested in China, despite challenges ranging from a property market meltdown to COVID-19 lockdowns.

Growth opportunities

For Charis Wong, director, head of fund solutions, Asia Pacific, Credit Suisse, one appeal of China is the low correlation of its performance to other major global markets. That means a China allocation can provide a diversifying effect on a portfolio.

The US and Europe, Wong explained, “are still suffering from high inflation (…) while (…) in China [the annual inflation rate is] still at a benign level of around 2.5% as of July”. This gives Chinese authorities much more breathing space to run looser monetary and fiscal policy, she explained during a fireside chat entitled Timing the Opportunity to Capture China’s Growth.

Charis Wong, Credit Suisse

However, Gabriel Chan, head of investment services, Hong Kong, BNP Paribas Wealth Management, stressed that investors had to be selective with their China exposure in light of headwinds such as a weakening property market and regulatory pressure on offshore-listed platform companies.

He pointed to signs of weaker sentiment towards Chinese technology groups from international investors — including the decision by South African investor Naspers to cut its stake in Tencent and Warren Buffett’s Berkshire Hathaway reducing its holding in electric vehicle-maker BYD. “With that selling pressure, it may just keep the valuations low for a long period of time,” Chan affirmed.

Sustainability is one theme that Credit Suisse — which recently reduced its China weighting from overweight to neutral — remains bullish on. Wong pointed out that renewable energy only accounts for around 10% of China’s current energy mix, but this will have to go up to 90% due to the country targeting carbon neutrality by 2060. At the same time, China accounts for a third of global CO2 emissions, the highest in the world.

Gabriel Chan, BNP Paribas Wealth Management

“We believe that there are a lot of reasons for China to provide policy support to make sure that they make a change here,” said Wong, which should benefit sectors such as electric vehicles, green infrastructure and renewables. “These are all the main reasons that we believe that there are a lot of growth opportunities for clean energy, maybe for decades to come.”

However, one challenge for Credit Suisse had been finding funds through which to play the sustainable China theme. “We have met a couple of fund managers specialising in ESG for China, but very few of them provide pure exposure to sectors [to which] we have high conviction, including solar, wind, electric vehicles, and the battery materials,” Wong explained.

New sources of income

One area that Chan is interested in bulking up BNP Paribas WM’s product shelf is small and mid-cap equities, particularly those listed in China’s onshore market. According to Chan, these companies are less exposed to recent regulatory changes in China, are more sensitive to policy loosening, and are the beneficiaries of trends such as increasing domestic consumption.

In recent years, one of private clients’ preferred parts of the Chinese market has been high-yield bonds. But considering the meltdown of the sector and a flurry of defaults by high-profile developers, BNP Paribas WM has been advising clients to diversify away from these assets. In terms of replacements for this source of income, Chan recommends looking at other parts of Asia-Pacific. “We like emerging market bonds, in particular from countries that are major commodity exporters, such as Brazil, Malaysia and South Africa.” Strong commodity prices, he added, should help support the currencies of these countries as well.

Asian Private Banker would like to thank the following sponsors of Fund Selector Nexus Hong Kong 2022

In a session entitled “The future of investing in China”, Tessa Wong, a product specialist at Allianz Global Investors, outlined how the world’s second-biggest economy promises long-term returns despite short term volatility. For the time being, policy settings will likely remain far looser than other major economies. And with valuations below historical levels, this should provide near term support for China equities.

Despite the market recent volatility, equities remain an important asset class. At a time when some investors question their Asia ex Japan allocation, Baillie Gifford is as bullish as it has been for many years, highlighted Andrew Keiller, investment specialist, and Edward Lo, intermediary clients, Asia, Baillie Gifford, in a breakout session.

The Asia IG debt markets have demonstrated resilience over the past 18 months, PineBridge Investments pointed out in a presentation. The asset class can provide stable income and uncorrelated alpha, acting as a durable core allocation across market cycles, said Andy Suen, portfolio manager and head of Asia ex Japan credit research.

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