Schroders said today at its 2017 second half investment outlook conference that China equity and fixed income markets will likely see accelerated onshore investments, boosted by improved fundamentals and a range of supportive market developments, in particular, inclusion of China A-shares in MSCI Emerging Markets Index and the upcoming Bond Connect.
Jack Lee, Head of China A-Share Research, said: “It is now an opportune time to include A-shares in the MSCI Emerging Markets Index, as foreign investors have begun having a better understanding of the market following the launch of the Shenzhen-Hong Kong Stock Connect last year.”
“The significance of the inclusion does not lie in the immediate capital inflow, as it will typically take approximately one year to implement the inclusion. However, it points to China A-shares becoming a key feature of emerging markets and part of the asset allocation consideration set for global investors.”
Stable backdrop for China A-shares
Schroders expects 2017 to be a year of stable growth for China, backed by the supportive rhetoric from the National People’s Congress and in the lead-up to the 19th National Congress of the Communist Party of China this autumn.
Jack added: “Our investment focus hinges on high-value-added manufacturing industries, where China should enjoy the competitive advantages stemming from abundant supply of highly educated and skilled individuals. We look for companies in technology areas that have global competitiveness. We believe some of these companies may pose threats to and gain market shares at the expense of traditional incumbents in other Asian markets, such as Taiwan and Korea.“
On consumption, Chinese consumers are increasingly willing to pay a price premium for better quality. Schroders believes that this differs from the trend of luxury goods growth some years back, with consumption now driven by mass end-consumers instead of extravagant spending by a small percentage of individuals.
Jack concluded: “We are optimistic on domestic spending in 2017. We expect the trend of consumption upgrade to be more sustainable and wide spread this time, from automobiles, travel to home appliances and home improvements across areas of decoration and furniture. As the RMB has weakened significantly since 2015, consumers may be inclined to spend domestically rather than going overseas. As such companies with exposure to domestic tourism are likely to benefit.”
Bond Connect presents opportunities for enhanced yield in bond portfolios
The China fixed income market is now the third largest bond market following the US and Japan, and is progressively opening up to international investors. This is a trend that will be further boosted when Bond Connect goes live.
Angus Hui, Fund Manager of Asian Fixed Income, said: “Most international investors’ interests currently focus on government bonds and quasi-sovereign bonds. We believe that the fast growing credit markets will also present opportunities for international investors in the coming years.“
“China onshore government and corporate bonds have already become a strategic allocation in many of our portfolios. With the expansion of access to the onshore Chinese bond market via the CIBM scheme and the upcoming Bond Connect, we expect to increase our participation in Chinese credit markets over time. Bond Connect also opens up an opportunity for us to further enhance our investment offerings to investors looking for attractive yields in their portfolios.“
Schroders has been investing in Chinese corporate bonds issued in USD for more than a decade and was one of the first movers into the China offshore RMB market (CNH) following its launch in 2010. Schroders expanded its reach into the Mainland China bond market in December 2014 by investing in onshore corporate bonds via the RQFII quota scheme.
Capturing opportunities in a diversified portfolio
Ricky Tang, Product Manager of Multi-Asset, said: “Certain economic and political factors may cause volatility in the region in the near term. A dynamic and unconstrained investment approach to stocks and bonds is likely a better method in helping investors balance risks, mitigate volatility, and achieve sustainable risk-adjusted returns.”
“We are constructive on equities and we are shifting our bias slightly towards onshore equities, and have started to take profit from offshore equities which have strongly outperformed year-to-date. In fixed income, onshore bond yields could face upward pressure in the short term. However, the asset class has now become more attractive over the medium term from a valuation perspective. We will look to gradually increase holdings of China onshore bonds in our portfolio.”
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.