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Chinese equities:
Finding alpha in the ‘old’ and ‘new’ economies

By: Greg Kuhnert, All China Equity Portfolio Manager
Opportunities abound, at good valuations

We believe the Chinese market offers good long-term investment opportunities, across both the ‘new’ and the ‘old’ economy. Not only do Chinese equities offer superior long-term earnings growth potential, they currently trade at a discounted valuation to developed markets.

Figure 1: ‘New’ economy revenue growth is strong and ‘old’ economy is improving
A-share sales growth YOY

Source: Wind, 30 June 2017

The ‘new’ economy offers growth

We see compelling growth opportunities in ‘new’ economy sectors, whose markets remain significantly underpenetrated compared to developed markets. New economy sectors such as consumer, technology, internet and healthcare, have experienced steady growth and increasing returns.

The ‘old’ economy offers value in recovery and reform

We also see opportunities in the ‘old’ economy where we recognise the potential for improving profitability from industry consolidation, cost-cutting and supply-side reform. Old economy sectors such as banks, real estate, commodities, heavy industrials and utilities, are recovering, while capital expenditure has not increased for several years. This has encouraged old economy corporates’ free-cash-flow-to-equity-holding metric to improve and leverage to decrease, creating interesting value investment opportunities for equity investors.

Inefficiency generates opportunity

China’s domestic equity market demonstrates all the characteristics of a highly inefficient market. We think there are two main reasons for this: market structure, and data quality/availability. Retail investors dominate the A-share market, representing over 80% of the daily trading volume. Retail investors exhibit more short-term behavioural biases. They are heavily influenced by short-term news flow, making the market more volatile than one driven by institutional investors.

Figure 2: Trading volume of investors in China's A-share market

Source: CICC, Shanghai stock exchange, June 2017

The reliability of China’s official economic statistics has long been questioned by the investment community. In addition, the market is relatively under-researched by institutional sell-side brokers.

The relative inefficiency of Chinese equity markets creates an opportunity for disciplined bottom-up investors who favour a long-term investment strategy, like the 4Factor™ process.

The efficacy of this investment process has been demonstrated through the strong alpha generation exhibited by the Investec All China Equity strategy over the last three years.

A history of outperformance

Our 4Factor™ All-China strategy has consistently outperformed its index since inception.

Figure 3: Annualised (Gross) performance in USD*

  2014 (Mar) 2015 2016 2017(YTD)
Strategy 28.8% 11.8% 3.5% 52.4%
Comparison index** 34.8% 1.8% -12.2% 28.1%
Relative performance -6.0% 10.0% 15.7% 24.4%

Past performance is not a reliable indicator of future results, losses may occur.

Source: Investec Asset Management, 30 September 2017. 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. The periodic deduction of fees and expenses will have a compounding effect on performance. Example effect of management fees taken monthly over 10yrs on the value of a client’s portfolio: Initial value = $100m, assumed return = 10% p.a., grows to $259m (no fees), grows to $241m (0.75% p.a. net fees). The annualised returns over 10yrs are 10% (gross of fees) and 9.18% (net of fees).
* 4Factor™ All China Equity Strategy inception date: 01 March 2014.
** Comparison index: MSCI All China NR. For further information on indices, please see the Important Information section.

Why Investec for Chinese equities?

  • Invests in Chinese equities listed anywhere to maximise exposure to ‘best ideas’.
  • Managed using the disciplined 4Factor™ investment process, which combines both traditional and behavioural investment factors.
  • Specialist team with a strong track record of picking stocks in China.
  • We believe our global perspective enhances analysis of Chinese stocks.
  • High conviction portfolio: style and size agnostic with no benchmark constraints.

Specific risks

Geographic / Sector: Investments may be primarily concentrated in specific countries, geographical regions and/or industry sectors. This may mean that the resulting value may decrease whilst portfolios more broadly invested might grow.
Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income.
Developing market: Some countries may have less developed legal, political, economic and/or other systems. These markets carry a higher risk of financial loss than those in countries generally regarded as being more developed.
Investing in China: Investment in mainland China may involve a higher risk of financial loss when compared with countries generally regarded as being more developed.
Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. bankruptcy), the owners of their equity rank last in terms of any financial payment from that company.


Important Information
The information may discuss general market activity or industry trends and is not intended to be relied upon as a forecast, research or investment advice. The economic and market views presented herein reflect Investec Asset Management’s (‘Investec’) judgment as at the date shown and are subject to change without notice. The value of investments, and any income generated from them, can go down as well as up and will be affected by changes in interest rates, exchange rates, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets invested in.

There is no guarantee that views and opinions expressed will be correct, and Investec’s intentions to buy or sell particular securities in the future may change. The investment views, analysis and market opinions expressed may not reflect those of Investec as a whole, and different views may be expressed based on different investment objectives. Investec has prepared this communication based on internally developed data, public and third party sources. Although we believe the information obtained from public and third party sources to be reliable, we have not independently verified it, and we cannot guarantee its accuracy or completeness. Investec’s internal data may not be audited. Any decision to invest in securities or strategies described herein should be made after reviewing the prospectus and conducting such investigation as an investor deems necessary and consulting its own legal, accounting and tax advisors in order to make an independent determination of suitability and consequences of such an investment. This material does not purport to be a complete summary of all the risks associated with this Strategy. A description of risks associated with this Strategy can be found in the Prospectus or other disclosure document for the fund or Strategy. Copies of such documents are available free of charge upon request. Investec does not provide legal or tax advice. Prospective investors should consult their tax advisors before making tax-related investment decisions.

Investment Team
There is no assurance that the persons referenced herein will continue to be involved with investing for this Strategy or Fund, or that other persons not identified herein will become involved with investing assets for the Manager or assets of the Strategy or the Fund at any time without notice.

Investment Process
Any description or information regarding investment process or strategies is provided for illustrative purposes only, may not be fully indicative of any present or future investments and may be changed at the discretion of the manager without notice. References to specific investments, strategies or investment vehicles are for illustrative purposes only and should not be relied upon as a recommendation to purchase or sell such investments or to engage in any particular Strategy. Portfolio data is expected to change and there is no assurance that the actual portfolio will remain as described herein. There is no assurance that the investments presented will be available in the future at the levels presented, with the same characteristics or be available at all. Past performance is no guarantee of future results and has no bearing upon the ability of Manager to construct the illustrative portfolio and implement its investment strategy or investment objective.

Performance Target
The target is based on Manager’s good faith estimate of the likelihood of the performance of the asset class under current market conditions. There can be no assurances that any Strategy or Fund will generate such returns, that any client or investor will achieve comparable results or that the manager will be able to implement its investment strategy. Actual performance of investments and the Fund or Strategy overall may be adversely affected by a variety of factors, beyond the manager’s control, such as, political and socio-economic events, adverse changes in the interest rate environment, changes to investment expenses, and a lack of suitable investment opportunities. Accordingly, Performance Targets may be expected to change over time and may differ from previous reports.

Specific Portfolio Names
References to particular investment or strategies are for illustrative purposes only. Unless stated otherwise, the specific companies listed or discussed are included as representative of the Strategy or Strategies. Such references are not a complete list and other positions, strategies, or vehicles may experience results which differ, perhaps materially, from those presented herein due to different investment objectives, guidelines or market conditions. The securities or investment products mentioned in this document may not have been registered in any jurisdiction. More information is available upon request.

Indices are shown for illustrative purposes only, are unmanaged and do not take into account market conditions or the costs associated with investing. Further, the manager’s strategy may deploy investment techniques and instruments not used to generate Index performance. For this reason, the performance of the manager and the Indices are not directly comparable. 

If applicable MSCI data is sourced from MSCI Inc. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.If applicable FTSE data is sourced from FTSE International Limited (‘FTSE’) © FTSE 2017. Please note a disclaimer applies to FTSE data and can be found at