In the “Year of the Pig”, China will likely continue grappling with slower growth, a mountain of debt and a trade war with the US. But according to Chinese legend, the pig is a sign of good fortune – which is consistent with our long-term view of China’s economic potential.
China is set to usher in the Lunar New Year – and the “Year of the Pig” – on 5 February
China’s high debt levels and slower growth will likely last well beyond the New Year celebrations, but we believe China’s government has the right tools to
With China’s economy on track to become the largest in the world, we believe investors must think about China as an asset class
Fattened up on debt and penned in by trade?
We expect China may deliver slower growth in the near term because of its high debt levels – estimated at as much as 300% of GDP – and because of concerns about the trade war with the United States. But more important than trade headlines is the potential for a
US-China “tech cold war”
that could result in two competing high-tech ecosystems and force the rest of the world to choose sides. As trade tensions drag on, investors should watch for companies around the world – but particularly in the US and China – that are grappling with threats to their manufacturing supply chains. It’s also important to be mindful of export-driven companies that could see weaker earnings growth prospects due to trade-related issues. On the positive side, some companies seem set to benefit from these tensions – particularly in countries such as Vietnam, which is picking up new manufacturing business as the trade war drags on.
“Made in China 2025”: a highly intelligent strategy
High debt levels, slower growth and trade wars are long-term issues that can’t be solved overnight, but we believe China’s government has the right tools to solve them. President Xi Jinping has spelled out clear strategies to create more demand inside China and to move up the value chain of many industries. This is at the heart of the “Made in China 2025” programme for advanced manufacturing. By shifting China’s industrial capabilities into high-tech areas such as aerospace and robotics – and away from apparel, consumer electronics and other lower-value products – China hopes to avoid the “middle-income trap” to which so many emerging economies have succumbed.
Look beyond the New Year: think long term
In terms of sheer economic growth, China is no longer the force it was for the last 20 years. As it lowers its debt levels and rebalances towards a consumer-driven economy, it will become a different type of investment opportunity. But in the very long term, China is almost certain to become the largest economy in the world – and a global leader with a seat at the table in Asia and elsewhere. So we believe investors must think about how to allocate to China – just as they think about how to allocate to the US.
This is a far cry from today, where most investors’ global equity portfolios allocate a fraction to China versus the US. But if you think about the sheer scale of China's economy, we believe this points to a significant mismatch. As a result, we believe we are at the beginning of a long journey that will see investors consistently increase their allocations to China over time.
Of course, this is a new theme to many investors, in large part because China's financial markets have essentially been closed to foreign investors for years. Only recently have we seen an opening up of the access to China's equity and bond markets to foreign investors through the “bond connect” and “stock connect” programmes.
But with greater access comes new risks and opportunities that investors need to navigate. With that in mind, here are some of our top investment ideas for the year ahead:
Identify the winners and losers in China’s A-share market. The losers may be companies dependent on imports from the US as part of their manufacturing process. But the winners could come from the “new economy” sectors such as consumption, technology, the environment and health care.
Hunt for income. Income can provide a host of benefits to portfolios, but it isn’t easy to find in today’s low-yield world. However, Chinese bonds still offer healthy yields and attractive real return potential inside a global bond portfolio.
Take an active, bottom up approach to investing in China. It helps to understand local business practices, accounting methods and company structures. In-depth, proprietary research may be able to provide an advantage.
Keep an eye on the “G” in “ESG”. In recent years, environmental, social and governance (ESG) factors have become increasingly important indicators of a company’s health and prospects. Governance can be a particular issue in China, which is why it is important to for asset managers to have experts on the ground who can conduct in-depth analysis, speak to management teams and truly understand
how companies are approaching ESG factors.
We know China has its challenges, but we believe its leadership is well-placed to handle them – which helps make China an asset class that clients should consider actively participating in. In the end, it's not really a question of whether investors should buy China – in our view, the better question is rather how much they should buy.
Focusing on a limited number of issuers, sectors (such as the technology sectors), industries or geographic regions increases risk and volatility. Investing involves risk. There is no guarantee that active management will outperform the broader market. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the date is not guaranteed an no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association and Investment Trust Association, Japan]; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.
Neil Dwane is a portfolio manager and the Global Strategist with Allianz Global Investors, which he joined in 2001. He coordinates and chairs the Global Policy Committee, which formulates the firm’s house view, leads the firm’s bi-annual Investment Forums and communicates the firm’s investment outlook through articles and press appearances. Neil is a member of AllianzGI’s Equity Investment Management Group. He previously worked at JP Morgan Investment Management as a UK and European specialist portfolio manager; at Fleming Investment Management; and at Kleinwort Benson Investment Management as an analyst and a fund manager. He has a B.A. in classics from Durham University and is a member of the Institute of Chartered Accountants.
Investment income provides many benefits – including guarding against inflation – but today’s “safe” bonds may offer no or ultra-low returns. We suggest investors hunt for income among “riskier” income generators like corporate bonds, emerging-market debt and dividend-paying stocks.
Inflation is an overlooked risk that can feel higher than official inflation numbers – but even 2% annual inflation can reduce purchasing power by almost 20% over 10 years
Slow economic growth and low interest rates mean market returns – beta – may also be low; this underscores the importance of taking enough risk to earn a sufficient return
Many "safe" bonds offer zero or ultra-low returns – and now that most central banks have stopped raising rates, easy and attractive cash returns are hard to find
Investors who “hunt for income” using riskier asset classes may be able to fight off inflation, stabilise returns and reduce overall portfolio volatility
An active approach to income investing can help investors search for opportunities and manage a broad range of risks