“Chinese equities have long-term growth potential and in the short to mid-term, valuations are not expensive, even cheap, compared with developed markets,” said Wenchang Ma, co-manager of the Investec All China Equity fund, at a recent Hong Kong media briefing.
In February, Ma became co-manager of the $1.4bn fund, joining Greg Kuhnert, who has managed the fund since inception in 2015.
The managers seek long-term growth. The fund has outperformed the benchmark by 4x over the trailing three years and has beaten the peer category average (see chart below).
However, the fund’s volatility is also high. Three-year annualised volatility to 23 July was 18.93% against the fund’s benchmark MSCI All China (17.94%).
The very high conviction portfolio has only 32 holdings and an active share of 77%, according to the firm. Top three positions are Ping An Insurance, which is 10% of the portfolio, Tencent (8.3%) and Alibaba (7.9%). The top ten account for about half of the fund.
According to Ma, investment themes in the portfolio, which are expected to provide meaningful growth over the mid-long term, include “new economy” (consumption and services); restructuring and reform of state-owned entities; strong national consumer brands; and stable cashflow and yield (such as utilities).
The managers are currently overweight industrials, real estate and utilities, but they have reduced technology exposure.
“We now underweight information technology most as the industry’s supply chain has been influenced by the trade dispute,” Ma said. “We’ve seen that the IT industry’s volatility is high.”
Ma admitted that direction of the trade talks and future performance of China’s economy will influence the firm’s views on the Chinese market and on earnings revisions.
Other China equity risks cited by the firm include corporate governance issues, unsatisfactory management of state-owned enterprises and high corporate leverage during a time when the economy is slowing.
Stay with China equities
Investec joins a growing list of asset managers as well as the region’s fund selectors in favouring Chinese equities, despite the ongoing trade dispute between China and the US and the slowing Chinese economy.
Volatility is evident this year as the MSCI China index is up 12.5% this year after dropping about 15% during May, only to rebound in June.
Nonetheless, HSBC Global Asset Management remains positive on Chinese equities, even though the market was down about 26% in 2018.
“Despite concerns over the trade agenda, we think China’s policymakers are good at striking a balance between risks of the economy overheating and stimulating the economy by maintaining flexibility in fiscal and monetary policies,” said Bill Maldonado, chief investment officer at HSBC Global Asset Management.
Rob Mumford, a Hong Kong-based portfolio manager for emerging market equities from Gam Investments, added that after Chinese equities plunged last year, valuations became “ridiculously” attractive.
“Although the market looks like it is in neutral territory, when you strip out Alibaba and Tencent, the market is trading incredibly cheap,” he said.
Investec All China Equity Fund vs the benchmark and category average