Although the banking sector in China has been overshadowed by non-performing loans for years, there is proof that loan quality is starting to improve in the country, Gaud said, speaking to the media in Hong Kong.
Currently, China’s reserve requirement ratio (RRR) stands at 17%, which indicates a low lending capacity across the entire banking sector, Gaud said. He expects the authority will lower the ratio to unleash more of the banks’ lending capacity in the near term.
“In China, like in the rest of the world, banks are now more confident to lend, which results in a rising demand in credit. The growth [in credit] is diluting the existing bad loans. Meanwhile, there is a recovery in the quality of loans in many energy companies that have been suffering for years.”
He believes China’s central bank is tightening on the inter-bank level while relaxing the reserve ratio to allow the domestic banks to have more money to lend.
Due to the expectation of a rate increase regionally and globally, banks are likely to be more profitable because they can charge clients more for loans.
Gaud said investors who are skeptical about the health of Chinese banks should also look at their dividend payout ratio in the past years.
“For those who think the operational figures of the Chinese banks are not accurate enough, they should explain the reason for those banks having been able to pay out 14% of their profit in dividends in the past five years,” he said.
He believes the payout capability cannot be a matter of merely clever accounting, as some analysts believe. Instead, there are some fundamental reasons banks can support the payouts.
Retail-driven risk
Gaud describes the equity markets in Hong Kong and China as a “roller-coaster” as investors seek returns in a “messy and extremely volatile” environment.
The retail-driven market in China will remain a concern. “Some rumours, which can be from Weibo or some social media platforms, could create some panic and affect the onshore investment sentiment massively,” he said.
Other than low predictability, the Chinese government has managed to stabilise the market over the past two years, Gaud added. “Although the volatility in the markets is not likely to go away in the short term, there has been remarkable achievements by the authorities in [attempting to] bring stability,” he noted.
Asia 2018
Compared to this year, Gaud sees a wider range of investment opportunities globally in 2018, particularly in Asia.
The region now has fundamentally solid profit growth. “Asia used to have troubles in translating top-line growth into profit earnings. Between 2011 and 2016, the annual average earnings growth in this part of world was 2%, which indeed put off equity investors,” he said.
In addition, corporates in the region were not spending rationally.
Today, for the first time in many years, the average free cash flow in Asia is higher than in the US, according to Gaud. The expansion of overall free cash flow in Asia proves that the corporates have become more rational and logical about spending.
“Although the stocks seem to be expensive, we should not be stopped by valuation. They are expensive for a good reason this time as these companies are structurally changing,” he said.
Gaud recommend avoiding the telecom sector because of their heavy capital expenditure requirements. “Many of the telecom providers have to provide a national service, which makes them dependent on government decisions. Structuring work on the 5G technology makes these companies spend ‘like no tomorrow’.”
