Delegates at the recent AIST Global Dialogue tour heard of several ways that superannuation funds could invest in China’s amazing continued rate of growth.
The value of Chinese equities has fallen from around 35 times earnings in 2007 to below 10 times earnings now. This is a clear buying opportunity for Stuart Rae, chief investment officer, Pacific Basin value equities for Alliance Bernstein, who takes a bottom-up approach to buying on shares listed on the Shanghai and Shenzen stock exchanges.
This makes sense due to the high volatility in A-shares caused by domestic retail investors who will typically see a complete turnover in their portfolio several times a year, as they chase profit and react to news of deal making, rather than looking at longer term earnings potential.
One conundrum of Chinese investing, and a key objection of many investors, which Rae tackled in his presentation was the inability of share valuations to match growth in the Chinese economy. He pointed out not all sectors of the economy feature in the stock market and so do not fully reflect the economy as a whole.
He sees opportunities in companies that stand to gain from the government’s priorities in cutting pollution and corruption, for example manufacturers of low emission vehicles. He is also anticipating value from the restructuring of state-owned companies by local governments seeking alternative sources of cash.
To purchase shares in companies that could match or exceed GDP growth, Dong Wang, chief executive officer at HSBC Jintrust Fund Management, recommends technology or healthcare companies benefitting from social and business trends.
The internet and its ability to take market share from traditional industries is a prevalent part of the investment story.
China is probably the only country where the number of people accessing the internet through mobile phones is bigger than through PCs said David Wei, the ex-chief executive of Alibaba and now a fund manager at Vision Knight Capital. He saw this as a harbinger for other major economies and a way of understanding the Chinese market.
Online retail growth in China is now 19 times the size it was in 2008, but the worth of the total retail market is only a fifth of the USA. And yet the online shopping mall Alibaba Group and second-hand trading post Tabao are now bigger than Amazon and eBay in terms of revenue. This is due to the lack of convenient physical retail penetration in China, which led to much greater reliance on online shopping delivery. Wei saw the provision of banking and fund supermarkets by online specialists as a threat to standard financial products.
This theme was picked up by Larry Chen, country head China at Fidelity Worldwide Investment, who cited the Alibaba investment platform Yu’e Bao which raised RMB 80 billion (approximately AU$13.5 billion) in the four months after its asset management platform was launched in Jan 2014 in partnership with money market funds manager TianHong Asset Management.
Local government debt
Several speakers told of the growing attractiveness of local government debt to investors. Rae said this was often paying around 4 per cent, making it more attractive than most developed world debt. This market is expected to grow due to a squeeze on credit and not least because of the small share of total tax revenue they get compared to the central government.
A more cautious view of the market came from the presentation given by AustralianSuper’s man on the ground in Beijing, Stephen Joske.
He saw the problems created by the expansion of credit by the Chinese government in reaction to the global financial crisis as leading to further weakening in valuations, particularly for companies and state owned enterprises that had run up too much debt. One signal change he is looking for is a firm indication that credit is under control again.
As such Joske is choosing the right moment to enter the A-shares market (companies listed in China, as opposed to H-shares, which are listed in Hong Kong) as part of Australian Super’s strategic asset allocation.
“You need to be on the ground to get market timing right,” said Joske, who describes the position of the fund as a “short-term bear on China”.
In the meantime, he is getting to know fund managers and potential investment partners – be they global pension funds, or local sovereign wealth funds. “Managers here do not have long term track records so you need to make judgements about that and you need to be here to find that out,” he said.