Chinese president Xi Jinping is taking concrete steps to focus government attention on addressing the problems, Francois Perrin, Hong Kong-based portfolio manager at East Capital, told media at a recent event.
“The Chinese government understands it is not just a question of ‘becoming green’ quickly, but a question of social stability,” he said.
In the initial draft of the five-year plan for 2016-2020, China has allocated RMB10trn ($1.5trn) to the environment. The figure is double the amount in the previous five-year plan. East Capital estimates environmental protection to account for 2.7% of China’s GDP by 2020.
China is already the largest clean technology market in the world, with focus on wind, solar power and electric vehicles. EV manufacturing is expected to get a further boost from the rapidly decreasing cost of batteries, which are also manufactured in China.
Although East Capital has the majority of its $3.7bn AUM invested in Eastern Europe, the firm’s China Environmental Fund, managed by Peter Elam Håkansson, was created to capitalise on companies that stand to benefit from the government’s drive to clean up the environment.
The fund implements ESG (environmental, social and corporate governance) factors through a proprietary process based on red flags, according to the firm. More than three out of ten possible flags disqualify a company from further consideration. The management adopts an active shareholder approach to the companies in the portfolio.
Perrin stressed several other factors that make Chinese equities attractive today.
Although the Chinese equity market is very liquid, it is dominated by retail investors and significantly under-owned by foreigners, who own only around 3% of the shares.
This is likely to increase after the inclusion of A-shares in MSCI emerging market indices, starting in the summer of 2018. As a result, Perrin said he expected $12bn-$18bn of inflows, adding that the effect on the market would be negligible.
“It’s a drop in the sea,” he said. “Think about the liquidity of the A-share market. On average there is $70bn per day in turnover. So there will be no impact in terms of flows.”
China’s equity market is likely to develop the same way as the markets of Korea and Taiwan did ten years earlier, Perrin argued.
“There is a lack of institutional involvement and a very low level of foreign ownership,” he said. “Ten years down the road, Taiwan and Korea all reached more or less the same level, from 80% retail to close to two-thirds institutional investors in the market, with more open access [for foreign participation]. We expect exactly the same in China.”
Other factors making China’s market attractive are valuations (still low compared to developed markets such as the US), the positive outlook on GDP and earnings growth, as well as progress in capacity optimisation in oversupplied industries.
“There are significant alpha-generating opportunities for active stock pickers,” Perrin said.
Three-year return of the East Capital China Environmental Fund vs the benchmark and category average
Data: FE, returns in euros.
Note: the East Capital China Environmental Fund is available to accredited investors in Singapore and professional investors in Hong Kong.