Bank of Singapore is boosting its equities coverage in China and Hong Kong through a new partnership with Haitong International, a stock brokerage firm and investment bank based in Hong Kong.

This is the first time Haitong has provided its research service to a private bank, and “with this landmark partnership, the Bank of Singapore’s coverage of Hong Kong and China stocks will double in quantity,” Jean Chia told Asian Private Banker.

“Clients will benefit from the significant expansion in equity research coverage built upon Haitong’s on-the-ground expertise in China. The equity research collaboration encompasses A-shares, H-shares and ADRs,” the CIO and head of portfolio management and research office said.

In addition to its in-house expertise, Bank of Singapore uses Morningstar for developed markets research. However, considering the breadth and depth of the Chinese market, having a local partner would mean a better understanding of the businesses and industries in the country, especially in light of recent policy moves.

Instead of replicating a full-scale investment banking/securities brokerage research platform, Chia said a partnership model would best fit an important piece of the puzzle needed to ensure the bank is investing intelligently in the region.

“Our research coverage of 150 Hong Kong and China stocks is going to double to 300 securities through this partnership.

“With third-party primary China equity research , we are able to add value on top of that with a secondary research layer to look at industry trends, themes, and sector-specific issues.”

Asia ex-Japan gets an upgrade
In February, Bank of Singapore moved US equities to neutral, but upgraded Asia ex-Japan to overweight, underpinned by increasingly constructive risk-reward in Chinese equities.

Its pecking order is probably most preferable to the onshore A-share market, followed by the Hong Kong equities market and offshore Chinese equity markets.

“We have been overweight US equities since Biden took office,” Chia said. “But we are at an inflection point from a monetary policy standpoint with the contrast of a tightening bias in the US versus China which is on an easing path.”

In other parts of Asia, Bank of Singapore is overweight Hong Kong, Singapore and Taiwan, and neutral on India, Indonesia, South Korea, Malaysia and the Philippines. It is underweight Thailand.

Greater sophistication
The CIO feels investing in China will become a lot more sophisticated, evidenced by what we have seen last year when idiosyncratic risks had adverse investment outcomes for investors in China.

“China is not a market where we can rely purely on beta,” she continued. “Where you just buy the index and hope that it goes up. It’s going to be about alpha generation from stock selection, sector rotation and access to investment styles in public and private markets.”

“In order to do that, we need to really have an in-depth insights and understanding of the companies and their behaviour through business cycles and periods of volatility.”

In light of China’s zero-COVID policy and the extent to which it could affect recovery, Bank of Singapore is forecasting a 5.5% growth in the world’s second largest economy this year.

On the lookout for hidden gems
With China’s policies prioritising “common prosperity”, the bank is seeing attractive opportunities in onshore sectors that could benefit from policy tailwinds such as de-carbonisation, onshore sourcing and import substitution, as well as new infrastructure and domestic consumption.

Companies in these sectors may not be as large as the major players in the market, and could be less on the radar in terms of international investors. But they provide exposure to some of the policy tailwinds as the Chinese government focuses on areas such as industrial automation and decarbonisation.

“These prospects could be found more in the domestic A-share market,” Chia said. “And that’s where we see the opportunity.”

“Our partnership with Haitong offers us exposure to both onshore and offshore China opportunities, which means we are better equipped to help clients build portfolios that get exposure to these trends,” she added.

Selective in credits
The bank remains cautious and neutral on China’s real estate sector. In fixed income, it is seeing a dramatic drawdown because of what’s happening to some of the top tier companies from a credit standpoint.

Chia is not ruling out China’s property sector entirely, but is highly selective in terms of the quality of the companies and their creditworthiness.

While there might still be bad news in China credit in terms of debt restructuring, she feels this is a bottoming process with more supportive government measures.

“We are starting to see value in selective companies and opportunities to rotate out of lower quality developers.

“We look at companies not just from the bottom-up fundamental standpoint of what’s the earnings quality, leverage and valuations, but also from an ESG standpoint.”

Facilitating the transition pathway
She pointed out that ESG investing in China and the rest of Asia will move towards a ‘transition’ rather than an ‘exclusion’ approach due to the stage of development as well as gaps in data collection.

Chinese companies, for example, may not be adequately covered by global standards or screened by ESG ratings agencies. Hence deeper credit and corporate governance analysis can highlight red flags in corporate governance such as related party transactions, Chia said.

“On the other hand, that’s also where the opportunity lies,” she continued. “The ESG opportunity is from uncovering companies that today are unrated or poorly rated, but have a clear pathway towards decarbonisation, or have clear strategy for ESG impact.”

The investment veteran believes having a sympathetic approach towards climate transition would result in greater influence on investee companies which can genuinely create impact.

“As an investment community in Asia, we must articulate our priority by not putting judgment on companies, but actually helping them or investing in them to facilitate the transition pathway,” she urged.

In that regard, for Chia, China is very rich in terms of opportunities, because there will be winners and losers from the structural shift in its economic model and climate change agenda.

Bank of Singapore likes China’s green economy theme including new energy vehicles, solar, and wind.

In other views
DWS’s APAC CIO Sean Taylor sees value emerging in both equity and credit markets in China. He is expecting assets to start outperforming after 1Q22 on the back of targeted government support and of regulations reaching implementation stage.

“China is following a completely different path than the rest of the world,” Taylor said. “In China, unlike in the US and Europe, there has been no major government support programmes since the coronavirus crisis started.”

He pointed out that credit availability and private consumption fell significantly. But what was negative for economic development in the short-term could pay off in the medium-term.

“While debt rose dramatically in industrialised nations, borrowing from the future, it fell by 7 pps to 272% of China’s GDP last year. China has not borrowed so much from the future as the US and Europe.”