Despite the wild swings in the A-share market over the past few weeks, Citi remains optimistic on Greater China, said Bacon, who heads private bank fund selection in Asia-Pacific.
However, “given the run up in A-shares, notwithstanding the recent correction, the bank continues to have a preference for H-shares over A-shares on valuations.”
Citi has also been rotating from A into H shares and has been focusing on “convergenc funds”, which aim to exploit the valuation difference between A- and H-shares, Bacon said.
The bank’s H-share focus is on the consumer sector, banks and TMT-related sectors. Real estate is excluded.
“We are hesitant to overweight real estate companies at this juncture.”
In Greater China, clients with a large allocation to real estate bonds have been reducing exposure, he added.
Selective equities
Equity weightings in the second half are mixed. Globally, the bank is underweight emerging market equities but has some exceptions. Overweights are on Greater China, Japan and India, and the rest of Asia gets a neutral.
He is cautious on the US markets, where the S&P is hitting record highs. Bacon said the bank is reducing exposure to US equities by taking profits, but he remains positive on global growth and European equities, despite the debt issues around Greece.
“We’re frustrated with the Greece situation. In itself, I don’t think it can be a serious spoiler to global growth but no doubt it is affecting sentiment and appetite for risk. The Eurozone is much better equipped to withstand a Grexit than previously. It can be absorbed.
“Once Greece is resolved, investors will take on more risk in 2016 than in 2015. Let’s get to the outcome quickly and then we can get back to fundamentals.”
Very selective fixed income
Globally, the bank is cautious on fixed income and mainstream fixed income allocations remain underweight, Bacon said.
The bank is underweight investment grade credit with a small preference to high yield over investment grade bonds. Specifically, he favors European and Asian high yield corporate bonds denominated in US dollars.
However, he warned on high yield bonds. “What is worrisome is a lot of retail money has been going into high yield bond funds and we are a little cautious on that. Clients with a full allocation to high yield have been taking money off the table.”
In a broader context, in 2015 the bank likes thematic plays that involve “dislocation”. Bacon provided some examples, such as energy, with oil assets at distressed levels, and bank balance sheet restructuring, for example, non-performing loans in Europe where banks are forced sellers and buyers are limited.
M&A through hedge fund exposure is another idea that has performed well for clients.
“Investor appetite for hedge funds is up dramatically,” Bacon said. “The first two months of the year interest was low. But now after the froth has come out of China’s market, people switched on to hedge funds, which have had six months in consistency of performance.”
China’s door creaking open
The second half of 2015 is proving to be surprising, particularly when it comes to China.
Bacon said the moves surrounding China’s market opening – the stock connect schemes, A-share inclusion on global indices, mutual recognition of funds – are simply support for a strong fundamental story.
The MSCI’s deferred decision to include A-shares in its global indices, put off until November, is important to the markets, as is the inclusion of Chinese ADRs in benchmarks, he said.
“The mutual recognition of funds is [also] an important evolution of the market but we don’t think it will turn on a wall of liquidity suddenly. It’s a marketing convenience, but not a driver of a huge amount of new money.
“We remain focused on fundamentals and not these initiatives. The initiatives support the fundamental case, [but] they are not sufficient on a stand-alone basis to make us optimistic on a market.”
Citi trimming and tweaking
This year, Bacon said discretionary mandates have clearly been picking up after a slow period following the 2008 financial crisis, when clients showed little interest. “Clients are becoming more comfortable outsourcing their allocations to professional managers and banks.”
The bank is also continuing to streamline the number of fund managers it works with globally while integrating the approved lists of the private and consumer banking divisions.
“We expect to see a lot more overlap between the consumer and private bank lists. But approved lists in different parts of the world will still need to be different from Asia,” Bacon said.
“We’re not going to limit the number of managers but will have a smaller number of relationships. Because the bank works across multiple geographies, the number cannot go too low. Funds aren’t valid in all parts of the world, and we can’t cover the whole world with 100-some funds.”
