“As near-term regulatory noise fades, the long-term drivers of structural growth come back into focus. These trends – among them, rising wealth, and the expansion of the middle class; digitisation; and China’s push for self-reliance in certain tech sectors – remain intact, and hence continue to be tailwinds for select Chinese firms. As a quality focused equity investor, strong Chinese companies continue to emerge within healthcare, IT and consumer areas in particular. The overall poor sentiment towards Chinese equities in 2021 sparked a general de-risking by global investors towards China. This has created opportunities within some stocks for confident tigers to pounce on”.
Fixed Income
On the hunt for over-sold corporate debt
In fixed income markets, recent turmoil has opened potential entry points for investors in developing-world corporate bonds. Alan Siow, Co- Portfolio Manager, All China Bond, Ninety One: “There are notable opportunities in bonds issued by Chinese businesses, as policy-tightening concerns last year sparked a broad sell-off – regardless of individual companies’ fundamental strength – while fears of a recession seem overblown and policy loosening looks set to mitigate macro headwinds”.
“The most pronounced mispricing is in China’s real estate sector, and potential to capture alpha both from overweight exposure to the area overall and from positioning within it. We are also looking to capture widespread mispricing opportunities arising from the contagion to other sectors in China, particularly among higher-rated bonds”.
“Looking at the emerging market corporate bond universe more broadly, many companies have entered 2022 on solid foundations, with high margins and strong earnings growth as they have recovered from the covid disruptions of 2021. Company balance-sheets are generally in good shape to weather headwinds, as the uncertain outlook last year dampened companies’ appetite for capital expenditure and expansion – which has also been reflected in positive rating actions. Coupled with low average default rates, the result is that emerging market corporate bonds remain a compelling asset class in 2022”.
Opportunities for bond investors with the apex creditor
Wilfred Wee, Portfolio Manager, All China Bond, Ninety One: “China is the largest official creditor in the world – the apex creditor, one might say – and its bond market behaves more like those of developed nations rather than the developing world. But that does not mean it moves in lockstep with the former. Far from it”.
“China’s economy will pursue an independent path this year. Its relatively stable growth and inflation outlook sets China apart from the economies of other investment-grade bond markets, where the risk of rate hikes is greater. That’s one reason why, despite the property market correction, China’s government bonds stayed reasonably well anchored. At current valuations, China’s US$700 billion offshore US dollar bond market has a chance of outperforming”.
“Meanwhile, China’s US$20 trillion onshore CNY-denominated bond market should remain particularly independent of other asset classes, offering diversification potential to international investors. Near term, the recent volatility among high-yield onshore bonds has created some attractively valued bottom-up opportunities for the discerning investor”.
“From a longer-term perspective, the ‘mainstreaming’ of China’s bond market – i.e., its increasing inclusion into major indices and the allocations of large international investors – shows no sign of reversing, providing another tailwind for the asset class”.
