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Chinese equities:
Is now the time for an All-China approach?

Greg Kuhnert, Strategy Leader
‘All-China’ approach provides the broadest opportunity set and maximises exposure to the best investment ideas

Chinese equities look attractive

The most recent earnings and sales growth figures from the Chinese corporate sector reveals a broad-based recovery and rebalancing. This recovery began as part of an infrastructure government spending programme last year, but has broadened out across the economy now, reinforced by a synchronised global recovery and a pick-up in exports as well.


Figure 1: Chinese corporate growth and earnings recovering


Source: Wind, Deutsche Bank Strategy Research, March 2017. See footnote below for more information.

At the same time, valuations look inexpensive relative to global equities, despite the MSCI All-China Index gaining 6% so far this year. The 12-month forward P/E for the stocks in our portfolio trade at about 11-12x, while global stocks are trading closer to 17-18x, representing a substantial discount.


There is money on the sidelines

Nevertheless, China remains significantly underweight in emerging market equity portfolios. We’re seeing a rise in fund flows, but have some way to go yet. When A-shares are included in the MSCI indices, it could be a catalyst for the asset class over the longer term.


Figure 2: China weight in GEM funds near record low


Source: EPFR Global, Morgan Stanley Asia/GEMs Equity strategy. Data as of February 2017

A holistic approach to Chinese equities

The structure of the Chinese market is fairly complex and we’ll leave it for another day to go into those details. Suffice it to say that we believe a truly holistic, ‘All-China’ approach provides the broadest opportunity set and maximises exposure to the best investment ideas.

Indeed many China equity index and active funds use the MSCI China index, comprised currently of around 151 stocks. Compare that with our comparative index, currently comprised of 964 stocks. But we don’t limit our All-China strategy to just the index: our potential universe includes 2892 A shares and 101 B shares in China. Adopting the All China approach thus can offer the potential for a much broader and more diversified portfolio.

The All-China approach also offers the opportunity to take advantage of price discrepancies between different lines of stocks. While this advantage will eventually be arbitraged away as Chinese stock markets liberalise, for the moment, only an All-China active management approach offers the chance to exploit this inefficiency.


Figure 4: Opportunity - A/H dual listing


Source: Bloomberg, 19 April 2017.

The 4Factor process works well in this universe

We believe we have proven the applicability and effectiveness of our 4Factor process within the All-China investment universe. We have a strong track record of performance in this area, built by two experience managers, supported by the wider 4Factor team with an average of 17 years’ experience. The combination of our proven process and alpha added by the team has generate an impressive track record since launching in 2014.


Figure 5: Annualised (Gross) performance in USD


Past performance is not a reliable indicator of future results, losses may be made.
Source: Investec Asset Management, 31.03.17.
Performance is gross of fees (returns will be reduced by management fees and other expenses incurred relative to its advisory account), income reinvested, in USD.
* 4Factor™ All China Equity inception date: 01.03.14
** Comparison index: MSCI All China NR. For further information on indices please see the Important Information section.


Why Investec for Chinese equities?

  • All China: Chinese equities listed anywhere to maximise exposure to best ideas
  • Investec 4Factor process: A tried and tested process with a strong track record
  • Two experienced managers: 30 years investment experience combined
  • Supported by the 4Factor Equity team: Comprising 29 people with average 17 years of experience
  • Bottom-up approach: Good stock picking skills evidenced by performance in Asia
  • Global perspective: Enhancing analysis on Chinese stocks


Feedback

If you have any questions or would like more information on the topic please contact us.

Figure 1: Old Economy = Following subsectors: Old Consumer Discretionary (Auto, Household Durables, Specialty Retail, Textiles, Apparel & Luxury Goods), Old Consumer Staples (Beverages, Food & Staples Retailing, Food Products), Energy, Old Industrials (Capital Goods, Transportation), Materials, Real Estate, Telecommunication Services, Old Utilities (IPPs); New Economy = Following subsectors: New Consumer Discretionary (Diversified Consumer Services, Internet and Catalogue Retail, Media), New Consumer Staples (Personal and Household Products), Healthcare, New Industrials (Aerospace & Defence, Commercial & Professional Services), Information Technology (Software & Internet, Semiconductors, Technology Hardware), New Utilities (Gas Utilities, Renewable Electricity, Water Utilities) Time period shown covers the period for which we have reliable data. For further information on investment process, please see the Important Information section.

Important information

Collective investment schemes (CIS) are traded at ruling prices and can engage in borrowing, up to 10% of portfolio net asset value to bridge insufficient liquidity, and scrip lending. A schedule of charges, fees and advisor fees is available on request from the Manager, Investec Fund Managers SA (RF) (Pty) Ltd (IFMSA) which is registered under the CIS Control Act. Additional advisor fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. CISs are generally medium to long term investments and the manager gives no guarantee with respect to the capital or the return of the Fund. The value of participatory interests (units) may go down as well as up. Individual investor performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax. Different classes of units apply to the fund and the information presented is for the most expensive class. Fund valuations and transaction cut-off time are 16h00 SA time each business day. These portfolios may be closed in order to be managed in accordance with the mandate. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Where portfolios invest in the participatory interests of foreign collective investment schemes, these may levy additional charges which are included in the relevant TER. A feeder fund is a portfolio that, apart from assets in liquid form, consists solely of participatory interests in a single portfolio of a CIS which levies its own charges which could then result in a higher fee structure for the feeder fund. Fund prices are published each business day in selected media. Additional information on the Funds may be obtained, free of charge, at www.investecassetmanagement.com. The Manager, PO Box 1655, Cape Town, 8000, Tel: 0860 500 100. Investec Asset Management (Pty) Ltd (“Investec”) is a member of the Association for Savings and Investment SA (ASISA). The scheme trustee is FirstRand Bank Limited, PO Box 7713, Johannesburg, 2000, Tel: (011) 282 1808. The dollar-denominated funds are sub-funds in the Investec Global Strategy Fund, 49 Avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg, and are approved under the CIS Control Act. IFMSA products are subject to the terms contained in the IFMSA Terms Document, as well as the Minimum Disclosure Document, which is available from our website www.investecassetmanagement.com.

All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information or opinion without appropriate professional advice after a thorough examination of a particular situation. Past performance of investments is not necessarily a guide to future performance. This is not a recommendation to buy, sell or hold securities. This is the copyright of Investec and its contents may not be re-used without Investec’s prior permission. Investec Asset Management is an authorised Financial Services Provider. Issued by Investec Asset Management, February 2017.

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