Extracting Alpha from China’s Equity Markets

Raymond Chan | 02/02/2017
China Equity

Summary

Investors who focus too much on China’s macro issues could miss the bottom-up opportunities available in a country that has more listed companies than the US, says our Asia-Pacific equities CIO. It’s a region that can reward active investors who understand the size and subtleties of a booming marketplace.

Key takeaways
  • We see investing in China as a bottom-up story that can reward active investors
  • With a total market-cap size of $10 trillion, China has more listed companies than the US
  • Unlike the US, many inefficiencies exist in China’s equity markets – which is where active managers can find alpha potential

When many investors think about China today, they focus on a few well-publicized macroeconomic concerns: property bubbles, non-performing loans in the banking system or the renminbi’s weakness against the US dollar. In our view, these are all valid issues, but we see investing in China as more of a bottom-up story – one that can reward active investors who understand the size and subtleties of a booming marketplace.

Consider that there are now more than 4,200 Chinese companies listed on stock exchanges around the world – mostly in Shanghai, Shenzhen, Hong Kong and the US – with a total market-capitalization size of USD 10 trillion. That means there are more listed companies in China than in the US. As in the US, the sheer size of this group means there are always interesting companies to be found. But unlike in the US, many inefficiencies still exist in China’s equity markets – and it is here where active managers have an opportunity to deliver alpha to investors.

For example, China’s equity markets – A-shares, H-shares and American Depositary Receipts – behave quite differently. The Shanghai and Shenzhen markets in particular are influenced more by local factors particular to their business climates: Shanghai is more represented by old-economy sectors, such as financials, while Shenzhen is dominated more by new-economy sectors, such as technology. Meanwhile, H-shares and ADRs are more influenced by overseas sentiment on China. This enables astute active managers who are focussed on fundamentals to exploit these differences and add another source of alpha potential.

Investing involves risk. 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. Investments in commodities may be affected by overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes and international economic and political developments. Investments in smaller companies may be more volatile and less liquid than investments in larger companies. Investments in emerging markets may be more volatile than investments in more developed markets. Dividends are not guaranteed. Bonds are subject to interest rate risk and the credit risk of the issuer. 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 data is not guaranteed and 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]; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

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Expert-Image

Raymond Chan

CIO Equity Asia Pacific
Raymond Chan is a portfolio manager and Chief Investment Officer (CIO) Equity Asia Pacific with Allianz Global Investors, which he joined in 1998. He is responsible for all AllianzGI investment professionals in Asia (excluding Japan). He has overall responsibility for his team’s investment process and performance and is the lead manager for the firm’s Core Regional (Asia Pacific ex-Japan equity) products. He was previously an associate director and the head of Greater China team with Barclays Global Investors in Hong Kong. He has a B.A. from the University of Durham, UK, and an M.A. from the University of Exeter. He is a CFA charterholder.

The Top 3 Themes Shaping Global Bond Markets

Franck Dixmier | 02/02/2017
Franck Dixmier speaks at the Investment Forum

Summary

Diverging Fed and ECB policies, resurgent inflation in developed economies and deep market uncertainty will be the top themes for bond investors in 2017, says our Global Head of Fixed Income. High-yield strategies in Europe and Asia and inflation-linked bonds should deliver performance.

Key takeaways

  • The US yield curve is not fully pricing in forthcoming Fed rate hikes, but the correction should continue
  • Despite its recent strong move, the US dollar could depreciate further
  • Euro-zone bond investors will remain in a low-interest-rate environment that alternates between risk-off and risk-on
  • Core euro-zone interest rates probably hit their lows in 2016, and should now edge higher

Unprecedented monetary-policy divergence

The current divergence in monetary policies between the US Federal Reserve on the one hand and the European Central Bank on the other is an unprecedented event in recent market history. The combination of a mature economic cycle in the US and the new Trump administration’s aim of stimulating growth – amid mounting price and wage pressures – leaves the Fed with few options in terms of monetary policy. Having procrastinated for a long time, the Fed will have to significantly raise its key rates in 2017 and beyond in order to preserve its credibility.

The ECB’s strategy differs greatly, however, and the central bank is equally determined to justify maintaining its ultra-accommodative policy. The temporary uptick in Germany’s inflation, which is unrepresentative of the rest of the euro zone, will not make the ECB adopt a different approach. Despite the fact that the technical limits of the ECB’s bond purchase programme are being progressively tested, we are not expecting any further adjustments to its tapering strategy before the third quarter of 2017.

Inflation resurgence bodes well

The resurgence of inflation among developed economies is positive news. This trend has clearly mitigated the risk of deflation, while the prospect of higher bond yields will also provide retail and professional investors with some breathing space. Rates have already adjusted significantly, particularly in the US, and will steepen further amid greater reactivity from the Fed.

Deep market uncertainty

Market sentiment is currently characterized by deep uncertainty. Investors have rarely been faced with such a broad range of macroeconomic, political and geopolitical risks. What should be expected from the reforms in the US undertaken by President Trump? Is there risk of an intercontinental trade war? What is the future for Europe? While these uncertainties have been clearly identified and are certainly reflected in valuations among the various asset classes, they have yet to be fully priced in.

Key conclusions for the fixed-income market

After taking all of these market forces into account, we have drawn the following conclusions for bond investors:

  • The US yield curve is not fully pricing in the forthcoming rate hikes by the Fed, and it should continue correcting through the end of the year.
  • Despite the US dollar’s recent strong move, it could depreciate further.
  • Core euro-zone interest rates probably hit their lows in 2016, and while they are edging higher, there are major support factors in place that should maintain yields at low levels and offset any upward pressure spilling over from steeper US rates.

Consequently, given these dynamics, euro-zone bond investors in 2017 will remain in a relatively familiar low-interest-rate environment that will alternate between risk-off and risk-on phases. High-yield credit-market exposure strategies in Europe and Asia should ultimately deliver performance; so should inflation-linked bonds – which, despite having rallied strongly, have not yet fully priced in the structural reflation trade that is currently underway.

Investing involves risk. 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. Investments in commodities may be affected by overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes and international economic and political developments. Investments in smaller companies may be more volatile and less liquid than investments in larger companies. Investments in emerging markets may be more volatile than investments in more developed markets. Dividends are not guaranteed. Bonds are subject to interest rate risk and the credit risk of the issuer. 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 data is not guaranteed and 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]; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

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Expert-Image

Franck Dixmier

Global Head of Fixed Income, CIO Fixed Income Europe
Franck Dixmier is Global Head of Fixed Income and Chief Investment Officer Fixed Income Europe. Franck is a member of the Global Executive Committee at Allianz Global Investors. He joined Allianz Group in 1995.
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