Louisa Fok, Bank of Singapore
The bank holds a neutral position in China equities as a whole due to a limited valuation expansion in the near term, Fok said at a recent media event in Hong Kong.
Her role is to advise the bank’s wealth management division on China equity exposure, and she mentioned some key risks that prevent an overweight allocation.
“The issue of a financial credit bubble still remains in China despite the government’s pledge to deleverage,” Fok said.
Additionally, she highlighted the US-China trade dispute, which could negatively impact the A-shares market.
“Risk of a trade war has not been completely eliminated. Investors should not rule out the risks since the two countries have not ironed out the conflicts.”
However, she does not see a huge impact on a single sector. “For now, the most impacted sector would be agricultural sector under the preliminary framework of the trade agreement. But the sector is not large [in terms of investment products],” she added.
Consumer and banks
BOS said the neutral position does not mean there is a lack of investment opportunities.
Johan Jooste, chief investment officer, is advising the bank’s wealth management team to consider China’s consumer companies as a key investment theme for 2018.
Only 11% of China’s population has reached the middle class, he said. Spending on activities such as travel, dining out, sports and gaming is much lower in China than in other countries. “That gap means that as incomes rise, this category, especially travel, could see the biggest growth.”
Fok added that education-related companies are also a preference.
“The rationale behind being bullish on China’s education companies is the rising demand from traditional Chinese parents while the middle class population is continuously expanding.”
Fok said the education sector is considered a highly-fragmented market and industry consolidation is expected to continue. “Because of the industry consolidation, investors should focus mostly on the beneficiaries of the change, namely the larger players.”
She also recommends China’s banks. The backdrop for banks is positive following the government’s initiative to reduce leverage.
“Profitability at China’s banks is improving for two reasons. The level of non-performing loans in mainland banks is reducing. Second, in a rising interest rate environment, net interest margins at Chinese banks are expected to improve as well.”
She has a preference for the big Chinese banks. “They generally have an advantage [over smaller banks] in raising capital while having a much smaller exposure in terms of shadow banking activities and the non-standardised wealth management product business, where authorities are trying to strengthen control.”
