2018 has been challenging for China equity investors but Bin Shi, Head of China Equities, sees a turning point and believes investors have to act now:
We are seeing a turnaround in the Chinese government's policy attitude and this makes a compromise on US/China trade issues more possible. BMW's move to take majority control of its local JV*, plus reversal of tough regulations like social security and private equity taxes, shows the Chinese government is encouraging inbound investment - addressing a key issue in the US/China trade dispute - as well as stepping up support to the economy.
The change in domestic policy is highly significant. Internal policies, like tougher regulations and deleveraging, have dented investor confidence and been the biggest influence on the market this year, with US/China trade issues a contributing factor.
Improvement in investor sentiment. The change in policy attitude means that systemic risk in the Chinese equity market has reduced significantly. A lot of the new policy changes haven't been fully realized yet and it will take time for investor sentiment to normalize, we're positive that sentiment will improve in the coming months.
Our original cash levels were around 20%, our levels are at 16% now and we expect to put more cash to work. That's because current valuations are attractive and we see opportunities in the market.
We will remain disciplined and focus on long-term favorites, but we will be more offensive in our allocations. We'll most likely add to sectors highly impacted by government regulations because we expect some of these regulations to be reversed in the future.
Overall, we believe the market has potential to be flat or slightly negative y-o-y by the end of 2018.
We are seeing a turnaround in the Chinese government's policy attitude and this makes a compromise on US/China trade issues more possible.
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