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BNP Paribas AM’s Wei: China is a ‘dream market’ for alpha

Wei Li, multi-asset quant solutions portfolio manager at BNP Paribas AM, explains why we should look beyond beta when examining China.

Despite a torrid year last year for China equities, the country represents a “dream market” for alpha generation that investors choose to ignore at their peril, according to Wei Li, multi-asset quant solutions portfolio manager at BNP Paribas Asset Management.

“The beta didn’t perform well if we look at the benchmark indices,” said Wei (main picture). “But if we look at the alpha performance, that can significantly beat the benchmark indices. China is the dream market for alpha generation.”

“Multi-factor investment has been widely applied to developed markets, but today it’s very difficult to apply a multi-factor quant strategy and beat the S&P 500. In China, there’s a very high factor premium.”

“If we just construct a very simple four multi-factor equity strategy, it can easily beat the CSI 300 by three percentage points, five percentage points,” according to Wei.

Wei’s comments come as China bucked the trend last year insofar as its major indices recorded double-digit falls at a time when stock markets in the US, Japan, India and elsewhere rallied.

In an interview with FSA in July last year, Wei had talked up the opportunities in China following an announcement from the country’s Politburo that it would introduce easing measures, which had sent investors swooning.

Indeed, in July last year, eight out of the top 10 highest performing funds were from China, according to FE fundinfo data, with the index up 7% overall.

But, that optimism proved to be short-lived as policymakers in Beijing failed to follow up the announcement with anything like the kind of detail that investors had hoped for, although Wei noted that while sentiment towards China was currently at a nadir, this could change quickly.

“Sentiment can change anytime. Sentiment can change very quickly. There’s still a lot of growth. GDP growth will likely reach 5% in 2023. This is a good market we shouldn’t ignore,” he said.

“Especially from the long-term investment perspective, China’s economy is being managed very well from a risk perspective. That’s why the China government didn’t release a $4trn grand stimulus package.”

That they didn’t release a grand stimulus package “disappointed investors, which is why sentiment is quite low. But when they realise that the risk in the China market has been managed so well and there’s still growth plus alpha in the market, they will come back.”

Wei also noted that the majority of flows last year in the region were towards markets that represented what he called “proxy investments” in China, notably Japan, underscoring the extent to which there remains a lot of international investor interest in the country.

He also pointed to the recent improvement in US-China relations, particularly following the meeting between US President Joe Biden and Chinese President Xi Jinping at the Apec summit as providing another welcome boost.

Although, overall, he noted that a lot of the performance of China equities this year will likely be driven by whether investors get comfortable with efforts by policymakers to support the economy, most notably in its beleaguered property sector.

“The one big issue investors are concerned about is the property market. If China can sustain its assertive easing to repair the confidence, we believe there’s a fair chance for the sustained rebound in the stock market in 2024,” he said.

Part of the Mark Allen Group.