Private Banking

Untapping China’s growth potential: offshore investors find fresh opportunities on the mainland

Improvements in the supply of reliable data, plus the relative stability of the yuan, mean investors are steadily becoming more confident about investing in the country’s equity markets

PUBLISHED : Saturday, 17 September, 2016, 12:18am
UPDATED : Saturday, 17 September, 2016, 12:17am

There is little doubt that China will continue to power much of the world economy in the decades ahead. But for private investors looking to capitalise on that growth story, it can still prove tough to navigate the intricacies of the mainland markets and assess the prospects for respectable returns in the short to medium term.

For some, concerns stem from a perceived lack of reliable data. For others, it is more about finding consistent themes and knowing where to start. But the fact remains that exposure to China stocks and related instruments is steadily becoming an integral part of any well balanced portfolio, and investors should plan accordingly.

“Overall, there may be some slowdown in fixed-asset investment in the second half of the year, but our economists still see Chinese GDP growth of 6.3 per cent for the period,” says Jack Siu, Asia-Pacific investment strategist for Credit Suisse. “Most debt is owned domestically, so there is little risk of default. Also, the PBOC [People’s Bank of China] will want to control currency depreciation and keep interest rates stable.”

Against this background, he suggests, it makes good sense for investors to focus on “new economy” plays in IT and technology. The more traditional industries may lag behind in terms of profits and prospects. However, with the one belt, one road initiative now firmly on the agenda and the Asian Infrastructure Investment Bank (AIIB) ready to start credit assessments, sectors seen as part of the “old economy” should not be dismissed.

“That is more of a long-term story,” Siu says. “Spending on infrastructure will have no immediate impact as so many counterparts are involved; it is going to be a slow process. But the topic is being talked about at a very high level and will eventually feed into the numbers.”

Even before that, Chinese steel producers look attractive in the present market and health care companies seem a good defensive pick in view of two clear trends. One is the well recorded demographic shift occasioned by an ageing population. The other is what mainland travellers buy on overseas trips, where health care items are at or near the top of most shopping lists.

“Demand is strong; companies just have to find the right opportunities to service the Chinese economy,” Siu says.

He adds that investors averse to the uncertainties of mainland equities may still consider the alternative of RMB-denominated fixed-income assets held to maturity.

“Because it is safe on risk and offers steady return levels, many people are comfortable adding allocation in this space,” he says. “And with European money flooding into Asian markets looking for yield, [performance should be sustained].”

Ken Peng, Asia strategist for Citi Private Bank, similarly believes that offshore investors are becoming gradually less fearful of China prospects. In his view, this can be put down to recent improvements in data and the relative stability of the yuan’s effective exchange rate. It is significant too that, in general, valuations are “undemanding”.

Generally speaking, we believe that sustainable growth opportunities are likely to come from consumer demand and benefit those best able to meet that demand
Ken Peng, Asia strategist, Citi Private Bank

“Recent data shows that the mainland authorities are getting better at fine-tuning the economy,” Peng says. “Structural challenges will remain in the coming years, but that is a common theme across many economies. Compared with most emerging markets and some developed markets, China has more resources at its disposal to manage the transition process.”

Regarding Chinese equities, Citi still prefers the offshore listed space more than A-shares – mainly because the onshore liquidity advantage from easy credit is seen to be fading.

“However, most institutional investors are not bullishly positioned on China, hence there is some scope for inflows,” Peng says. “Favourite areas like health care are still trading below post-crisis average valuations and we also expect firmer oil prices to support the energy sector. For growth, we like the internet sector best, as firms here facilitate consumer demand.”

He notes that a certain proportion of private investors now tend to find shelter in banks and utilities in the search for consistent yield. Worth remembering, though, is that these sectors could also be more exposed to a potential rise in credit risks or a hike in relevant commodity prices.

“Generally speaking, we believe that sustainable growth opportunities are likely to come from consumer demand and benefit those best able to meet that demand,” Peng says. “That’s why we also like industries such as FMCG [fast-moving consumer goods], [mobile tech], media and logistics.”

Considering a different perspective, Bank J. Safra Sarasin predicts that euro-zone companies will continue to be acquisition targets for mainland enterprises. In some cases, this will provide an indirect route for existing shareholders and savvy investors to participate in China-driven expansion.

Also, Chinese companies may follow the pattern of American corporates by issuing euro-denominated bonds, thus creating “reverse pandas”.

“With the euro having emerged as the preferred global wholesale funding currency, and given China’s increased targeting of European companies for M&As [mergers and acquisitions], the ‘reverse panda’ theme could gain traction in the foreseeable future,” says Benoit Robaux, the bank’s head of credit research. “It may not be long before a Chinese company seeking to fund their acquisition in the local euro currency joins the likes of Kellogg, Fedex, Kraft Heinz and Time Warner to debut a reverse panda. It would give them access to a different investor base that should welcome this new source of supply, given the scarcity of investable corporate bonds created by the European Central Bank’s ongoing purchases.”