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Deep Dive: A window of opportunity for multi-asset investors

Investing in a global multi-asset portfolio is as much as about combining diversified assets to improve risk-adjusted returns as it is about positioning to take account of global economic and monetary cycles. 

It is the idiosyncratic drivers of return behind different asset classes that provide genuine diversification, alongside global macro themes. Chinese equities, most notably A-shares, appeal in this respect.

China may be the world’s biggest exporter, but it is also among the biggest consumers. A-share firms generate over 80% of their revenues in China, making them aligned to growth dynamics in the domestic economy rather than global.

Despite channels providing international investors with access to A-shares, overseas investors hold less than 10% of the onshore equities market.  That is despite the prevalence of quality companies with an appreciation of the value that adherence to environmental, social and governance issues can bring.

Given China’s relatively closed capital account, domestic investors have a relatively narrow horizon. As a result, they act independently of global risk sentiment. It underlines the potential diversification benefits that exposure to China can bring. What’s more, investors can anticipate further “decoupling” between the US and China owing to their geopolitical rivalry, leading China to become increasingly self-sufficient.

As China reduces its reliance on the West, investors can find more domestic growth opportunities in the A-share market, especially now given uncertainty surrounding the future viability of American Depositary Receipts. 

The Covid-19 pandemic has driven China’s economic and policy cycles to become de-synchronised from the rest of the world. China was the only major economy to enjoy positive growth in 2020 and the first to start paring back policy support this year, even as the West stepped up monetary and fiscal stimuli.

The People’s Bank of China is the only major central bank practicing “normal” monetary policy today. Now it looks set to ease monetary and fiscal policies to support growth, while the US Federal Reserve is expected to move in the opposite direction by tapering quantitative easing in 2021 or early 2022.

All this demonstrates how exposure to onshore Chinese assets could offer meaningful diversification benefits to a global multi-asset portfolio. 

The primary focus for global asset allocators considering exposure to A-shares should centre on companies’ fundamental strengths, the domestic growth outlook, changes in the regulatory environment and fair value.

Many global investors focus on the A-share market’s highly volatile valuation multiples and overlook its annual earnings per share (EPS) growth of 4%-5% from 2008 to 2020 – which is favourable relative to US equities. 

Despite a sequential slowdown in China’s growth the first half of 2021, it is still running above trend year on year. Our A-share earnings model points to 10%-20% earnings-per-share growth this year, with companies on track to meet analyst expectations based on second-quarter results released so far. 

While China’s near-term economic prospects could become more challenged, partly due to the resurgence of Covid-19, the PBoC has just moved to cut the reserve requirement ratio (RRR). We anticipate more support for growth through local government bond issuance and fixed asset investment. 

Importantly, core consumer price inflation remains very weak in China, affording policymakers increased flexibility to adjust monetary policy.

Although regulatory uncertainty continues to weigh on investor sentiment, government measures appear sector-specific and fit a historic pattern of periodic tightening, rather than signalling the “end of capitalism” as some investors have feared. That said, investors need to be mindful of the widening divergence in earnings outlook between onshore and offshore stocks; regulatory uncertainty has hit internet-heavy offshore equities, while the prospects for IT, materials and healthcare sectors remain well supported onshore. MSCI’s China A Onshore index has already outperformed its offshore counterpart by 15% to date this year .

Following the recent correction, the A-share market’s equity risk premium has reverted to historical averages, making valuations less demanding than at the start of 2021. This has presented a window of opportunity for multi-asset investors to add exposure to quality A-share companies with high ESG standards – especially for those that still underweight this growth market. 

Irene Goh is head of multi-asset solutions, Asia Pacific at Aberdeen Standard Investments

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