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Swiss wealth managers: how we invest in China

As the National Congress of the Communist Party of China gets underway, Citywire Switzerland asks four firms for their views on the Chinese market.

Chinese equities are in constant demand, as the country's economy is enjoying healthy growth that the government is determined to support.

Four independent asset managers tell us whether they’re adding exposure to China, and if so, how they’re tapping the market.

These views were first published in the September 2017 issue of the Citywire Switzerland magazine.

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Roman Osselan, Lagane Family Office

Geneva

We believe China is a necessary exposure for any investor who wishes to construct a global portfolio. This is the case today even more than it was in the past.

Whether the country makes the headlines or not, China will still account for 20% of the world’s population and nearly 35% of global growth between 2017 and 2019. The Chinese authorities have learned the lessons of the uncertainty that weighed on 2015 and 2016, and the credit-control measures implemented since March are starting to pay off.

After a stabilising first half of the year, there has been a recovery in leading indicators since the beginning of the second half. This has resulted in a marked improvement in the country’s foreign trade, and a halt in the haemorrhage of capital outflows.

The only missing piece is inflation, which we believe will return, helped by the recovery of basic commodity prices, the stabilisation of energy and above all the easing of the dollar, which relieves the holding of foreign exchange reserves.

From a valuation standpoint, we note that Chinese equities are attractive: their profit price is between 11 and 13 times for listed companies, compared with 16 times for global equities. On top of that, these companies enjoy average profit growth of 20% a year.

Finally, we all know flows are a key driver. We believe that the opening of the continental exchanges at the end of 2014, combined with MSCI’s announcement in July of the integration of Chinese values in its emerging indices from next year, will bolster institutional managers over the next few years. This will dampen the previous volatility crisis.

Domestic investors are also returning: the number of accounts opened by individual investors is currently growing at a rate of 1% to 2% per month.

Our approach to China brings together the know-how of locally based fund managers who pass rigorous performance metrics and our own high-conviction stock picks.

Regular and transparent contact enables us to monitor the coherence of fund managers’ choices and gives us a feeling for the local companies they meet, beyond the headlines and our macroeconomic monitoring.

On conviction and on opportunity, we have historically completed these positions by the direct purchase of securities, which benefits from a liquid listing in American depositary receipts.

For example, we are investors in Baidu, in which we continue to see great potential.

The complementary nature of these two approaches allows us to provide diversification and a decisive input to better serve our clients.

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Christophe Karpiel

Geneva

The addition of Chinese A-shares to the MSCI Emerging Index is a substantial move. China represents roughly 28% of the index today, which will rise to over 40% post-inclusion.

Given the trend of growing investments in passive strategies, this will create positive momentum for Chinese equities.

However, the phasing-in process is likely to take several months, so in the short term it will most probably only have a moderate impact on the index.

Despite the fact that China’s economy grew at a robust rate in the first half of 2017, outpacing forecasts, credit growth is slowing down and tighter regulation of the financial sector should continue.

For the moment, Donald Trump has not launched any measures against ‘unfair globalisation’, but China is clearly a target for him.

We are also aware of the growing leverage of the Chinese economy, currently standing at 257% of GDP and increasing rapidly.

The Chinese market may seem globally attractive, but it hides large discrepancies. A significant number of Chinese listed companies are businesses that are currently trading at cheap valuations on account of their cyclical nature and poor corporate governance.

Equally, there are some very expensive businesses in high-growth areas such as technology.

Chinese equities have performed very well this year and we therefore feel that today is not an attractive entry point.

Although we don’t have any specific bets on the Chinese market, we have exposure to Chinese and Hong Kong stocks via active managers who invest in China as part of our broader emerging market and Asian selected funds.

Finally, we think other Asian countries may prove more interesting, including India, where structural changes continue to support strong economic growth.

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Marc Cujai, MC Vermögensmanagement

Vaduz

China is a really interesting market for us right now – not only because of the rising middle class, but also because of the valuation of the local equity market.

We have an allocation of about 5% to 10% in Chinese equities in our portfolio strategy, depending on the client’s risk awareness, even though the valuations for the price/earnings ratio on the potential growth of Chinese companies are still moderate compared to the European and American markets.

We are primarily investing in Chinese equities through our managed investment fund, MCVM China Brands.

We’re only investing in brands, so we’re looking at both the financial valuations of the equity and the strengths of the various Chinese brands going forward.

Our fund is relatively unusual in not investing in banks; the majority of Chinese funds and stock indices hold about 30% financials, but the balance sheets are too complex for us.

We think that Chinese brands will play an increasingly important global role in the years to come. There was very little awareness of them in the western world a few years ago, but brands such as Hisense, Huawei and Alibaba are now far more visible.

That trend will continue, with the technology and pharmaceutical sectors looking set to benefit the most.

Our top investment picks are companies such as Alibaba, TAL Education, Jiangsu Hengrui Medicine, Tencent, JD.com and Kweichow Moutai. They all have strong brands, great positioning in the Chinese market and really promising expectations for growth over the next few years.

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Hao Shao, Ayaltis

Zurich

We are setting up a multi-family office for Chinese high-net-worth individuals in Hong Kong at the moment, and we plan to invest in Chinese stocks mainly via hedge funds.

There are a lot of restrictions on the Chinese market. For example, you cannot buy and sell a stock on the same day.

It is also quite difficult to short stocks, as you cannot short some index futures more than 20 contracts per day.

Therefore, some high-frequency/arbitrage strategies won’t work in this market.

That said, other strategies could perform even better than their US equivalents, because the mark et is still more inefficient as a result of investor type, restrictions and complexity.

Some other positive trends are a potential co-operation with the London Stock Exchange and the inclusion of A-shares into the MSCI, which will be implemented next year.

We want to invest in the Chinese market through hedge funds, as local hedge fund managers know their turf best.

The market is so complex and vast it’s impossible to stay on top without being present locally. Many quant analysts in the US, such as Renaissance and Two Sigma, are of Chinese origin. I would probably focus on CTAs, quant-driven and event-driven strategies.

At the moment, I find event-driven hedge funds in China extremely appealing. If the majority of investors on the market are institutional, then the market reaction is usually very rational. When the market consists of 85% retail investors who have completely different explanations for events, the price reactions can sometimes be significantly over- or undershot. As a professional investor you can take advantage of such dislocations in the market.

China is very rich in financial events: companies are growing and a lot is happening on the capital markets, one example being IPOs and company leverage.

I would probably focus on CTAs, quant-driven and event-driven strategies. Fundamental investments are very hard to do in emerging markets: it is hard to short, sometimes difficult to understand financial reports and the mark et behaviour is completely different from Europe or the US. However, when it comes to fundamental investments in commodities, China is the place to be, because it is the commodity producing hub.

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