China equities: five key questions

Bin Shi, UBS Asset Management Head of China Equities, gives his views on key market issues and looks forward to the year ahead.

27 Apr 2018

1. China-US trade issues dominated Q1 2018, how have you responded?

We're an active manager but we haven't made drastic changes because of the recent trade issues.

Our funds are focused on China's domestic consumption and the impact from the China-US trade policies on the Chinese companies we invest in is very limited.

The companies most affected are the US- or Taiwan-based companies that export goods out of China to their local or overseas markets.

2. China IT stocks have seen a lot of price movement, are you worried about any particular risks to your investment thesis?

China's IT sector performed well in 2017 and markets raised their expectations for some of the larger names in the space.

While some have lagged the market expectations so far in 2018, we see no sign that their growth rates are set to decline.

In fact, leading names are performing in line with their own forecasts but the market is no longer excited about in-line growth.

We remain positive on China's IT sector over the long term and we see recent market weakness as a buying opportunity.

3. Will you change your investment positioning now that China's government is opening up the financial services sector, easing restrictions on imported cars, and strengthening intellectual property rights.

Not really.

Our funds have always focused on competitive companies not just in China, but also globally. We have always felt that companies need to be competitive globally in order to "win" in the long run.

On the trade barriers, we felt they would be lifted eventually, though the timing will be hard to be predicted.

Looking solely at the auto sector, we don't hold any positions in local auto companies, partly because we believe their high profit margins are unsustainable, particularly now that the sector competition will be intensified in the future.

4. Are you keeping more cash in view of better buying opportunities in the future?

We've had strong inflows recently and we continue to put cash to work.

The speed of our deployment is usually determined by stock valuations and how many opportunities we see in the market

Our high conviction names are not that cheap now but we continue to like them and are looking to buy them when there are market weaknesses.

5. Do you prefer A- or H-shares? What's your outlook for 2018?

We have been consistent in our message that we prefer H-shares because we think overall valuations are relatively cheaper.

Fundamentals in the H-share market look strong, and we’ve seen strong money growth from overseas and mainland China investors into the market.

Furthermore, reforms being made by the Hong Kong Exchange & Clearing may result in more Chinese companies will list in Hong Kong and make H-shares more attractive in the future.

That said, we don't expect the performance gap between A- and H-share markets to be as wide as last year. The MSCI China A index grew 18.15% in 2017, compared with 54.07% for the MSCI China index, which includes large and mid-sized Chinese stocks, including H-shares, listed outside of mainland China.

We do, however, maintain our positive outlook on Chinese equities and we're expecting the market to grow in 2018.

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