Wenjie Lu, Blackrock
“We have reduced our position in China from an overweight position toward a more neutral one,” he said at a recent media briefing in Hong Kong.
Lu was talking on behalf of the firm’s “Blackrock Investment Institute”, which provides independent research and insights to Blackrock’s portfolio managers and clients and does not reflect a Blackrock house view.
Lu believes that investor sentiment toward China has soured due to headwinds in the country’s economy.
“The onshore equity market has been hit a lot mainly due to sentiment,” he said.
Year-to-date, the CSI 300 Index has plunged -20.12%, which compares to the MSCI Emerging Index, which fell -4.98%, according to data from FE Analytics.
Blackrock uses a China “GPS economic indicator”, which in good times is significantly higher than the mainland’s purchasing managers index (PMI) figure, Lu said.
This year, however, economic growth has moderated and the GPS numbers are now getting close to China’s official PMI, which he sees as a sign of investment caution.
Moderating growth is linked to the official crackdown on shadow banking activities. Shadow credit now accounts to nearly 0% of the country’s GDP, which compares to 10% in 2016, he said.
“That means it will drag down the overall GDP growth in the next two years,” he said, adding that he expects more credit defaults to surface, especially from highly leveraged companies.
However, he acknowledged that the crackdown will create a healthier financial system in China.
Trade tensions with the US have also affected investor sentiment. “This obviously has added a lot of pressure to Chinese assets.”
Nevertheless, Lu said that the firm’s neutral position means it still finds opportunities in Chinese equities.
“Corporate earnings growth remains fairly solid. Earnings per share growth is still above 15%, which is very good. China is still a highly investible market despite the pressure of the slowdown.”
Within global equities, the firm prefers the US market over other developed markets on the back of strong earnings momentum, according to Belinda Boa, Asia-Pacific head of active investments and chief investment officer for emerging markets fundamental active equity.
She expects that the recent corporate and individual tax cuts will have have a positive effect on markets and the economy. However, she noted that the downside risk of the tax cuts is an overheating of the US market.
The firm’s outlook on European equities has soured because of increased political uncertainties as well as slowing growth, according to Boa. In Japan, Boa is neutral as the firm does not see any catalysts for the market to outperform.
The firm also likes some areas in emerging markets. “We’ve seen re-pricing in this space and we believe fundamentals are still very strong, which is a very attractive entry point for emerging markets.”
For example, the firm likes India’s domestic value and reform plays, such as the private sector banks in the country.
“India remains positive, as we think we are bottoming out in terms of the negative sentiment we’ve seen, despite the fact that valuations are still very high,” Boa said.