“The investment themes of our favorite Chinese equity portfolio managers have dramatically changed over the past year,” Morningstar said in the annual greater China equity sector wrap-up report released last week.
“In the current low-growth environment, many managers have instead strengthened their focus on, and have been paying a premium for, companies that have a higher certainty of meeting earnings expectations.”
Within the earnings theme, consumption plays such as e-commerce and automotive are most popular as well as some state-owned property developers with businesses mainly in the first-tier cities, the report said.
Although some companies are considered quite expensively valued, the ability to deliver earnings seemed to be the yardstick.
US-listed Alibaba, for example, is currently trading at 64 times the price-earnings ratio based on its actual earnings in 2016. Some managers “argued that the valuation is justified given the firm’s ability to deliver earnings on the back of robust gross merchandise volume growth”, the analysts said.
Managers “also found select value opportunities with turnaround potential”, the report added. Examples include oil companies, given “supply-side improvements, oil price recovery, and the oil companies’ beaten-down valuations.”
In general, managers tended to pare back on Chinese insurance holdings, the report noted.
“Managers were concerned about the decline in bond yields eroding the spread that insurers earn from reinvesting insurance premiums into bonds. Furthermore, certain insurers have been aggressively selling high-guaranteed-rate products, which have made them invest in higher-yielding, but also riskier, corporate bonds.”
Hong Kong-based insurer AIA Group was the preferred choice in the sector.
According to data from FE Analytics, the Greater China equity fund sector, comprising 59 funds selling in Hong Kong, returned 21.2% on average over a three-year period, lagging comparable indices.
The best-performing fund in the category is the UBS (Lux) Equity Greater China Fund, which gained 26.78% during the period.
The sector holdings in real estate within the category showed a sharp increase during August, according to FE.
