“We are long-term investors, so we must ride the market volatility caused by the effects of the coronavirus [Covid-19], and in fact have used periods of market weakness to top up positions at discounted prices,” said Naomi Waistell, portfolio manager at Newton Investment Management, a London-based subsidiary of BNY Mellon.
“Our core expectation is that the coronavirus outbreak — although terrible for those afflicted — will be contained and that there will a reasonably quick resolution of the crisis. [Moreover] any further fiscal and monetary stimulus measures should ultimately benefit our preferred Chinese growth stocks,” she told a Hong Kong media briefing yesterday.
Although the MSCI China index is down only 1.4% so far this year, in just two short months its annualised volatility is 26.15%, according to FE Fundinfo data.
“However, periods of market weakness or sharp price fluctuations should not detract from the deep-rooted and durable trends underway in China’s economy and its stock markets,” said Waistell.
Waistell is co-manger of the BNY Mellon Global Emerging Markets Fund, which has generated a three-year cumulative return of 25.15% (9.63% annualised) over the past three years, outperforming its benchmark MSCI Emerging Markets index (21.66%) and sector average (15.13%), according to FE Fundinfo data.
It has been more volatile than both its benchmark and peers, with annualised volatility of 16.17%, compared with 14.72% and 12.35%, but also has a superior Sharpe ratio (a measure of risk-adjusted returns) of 0.38, compared with 0.28 and 0.21 respectively.
The fund’s largest country exposures are to China (26.7%) and India (23.4%) and its biggest sector allocations are consumer discretionary (36.4%) and information technology (22.8%).
New economy
“China’s growth was previously driven by exports and investment. But during the past decade consumption has gradually become China’s main economic growth driver. The consequences are shown by the deployment of new technologies and supply chains, a transition to [online] service delivery, and the more demanding consumption patterns of a wealthier population,” said Waistell.
Indeed, [McKinsey Global Institute] research shows that there has been a 29% compound annual growth rate rise in China’s upper middle (or “upper aspirant”) class in terms of income since 2010, with 49% of the country’s urban population having an annual household disposable income of at least RMB 138,000 ($19,597) , compared with on 8% in 2010, noted Waistell.
They are increasing their discretionary spending, notably on healthcare, education and tourism (notwithstanding the temporary effect of the coroanvirus in curbing travel). Only 25% of annual consumption by urban households was spent on food in 2017, compared with 50% at the turn of the century.
“For example, the addressable market for education spending is growing along side rising wealth, and more than 8% of our portfolio is exposed to this theme,” she said. One of the fund’s top three holdings is New Oriental Education & Technology, a Beijing-based provider of private educational services.
As a result of these trends, the shape and composition of China’s stock market has evolved, as new technologies have expanded rapidly while more capital intensive industries have retreated in importance. So-called “new economy” stocks in the technology and consumer discretionary sectors displaced “old economy” energy, materials and industrial stocks as the largest components of the MSCI China index in 2015.
“Total returns from the internet, healthcare and consumer services sectors will continue to outperform the all-sector MSCI China index, driven by powerful and persistent themes,” said Waistell.
“We remain confident that the China growth story remains intact,” she concluded.
Changes in the composition of the China market
Source: Newton Investment Management
BNY Mellon Global Emerging Markets Fund vs sector average and benchmark
