UBS Asset Management's China investment experts got together with over 100 clients from banks and financial institutions at our exclusive Viewpoints Luncheon in Hong Kong on June 25th to chart the outlook for H2 2019 and outline investor opportunities.
- The US Fed will likely make one-to-two interest rate cuts in H2 2019
- US-China tensions not just limited to trade, rivalry will continue and make for lasting market volatility
- China's property sector is in good shape: demand is outstripping supply and we're still positive on larger developers
- Stimulus measures have put a base under the economy and we see an improving growth outlook for China in H2 2019
- Further policy support likely, such as cuts to interest rates/RRR
- Long run-drivers for China's economy remain intact, China equity valuations reasonable by historical measures
- Tweets are driving newsflow - particularly on the trade issue – but investors should cut through the noise and remember that fundamentals drive economies and the above factors offer many compelling reasons to be long-term positive on China
China macro: the L-shaped recovery
Hayden Briscoe, Head of Asia Pacific Fixed Income, started proceedings by reiterating his view in a L-shaped recovery for China in H2 2019. Policy stimulus has put a support under the economy and he expects the real effects of the stimulus will become clear in headline macro numbers in H2 2019.
Going further, Briscoe expects China to provide further support in the coming months, most likely via cuts to interest rates and reserve requirement ratios, and these will be important policy moves because of the likelihood that US-imposed trade tariffs will hit the trade sector, and also because of a likely slowdown in global growth.
China fixed income: strong case for government bonds; high yield offers attractive relative valuation
How should investors react to the slowing global backdrop? Briscoe explained that China's government bond markets offer investors some of the highest nominal and real yields in the world, in stark contrast to negative yields on German and Japanese government bonds.
Briscoe also showed that China high yield looks good on a relative value basis to US and European high yield. Looking at real estate sector - which dominates Asia high yield - Briscoe favors large Chinese developers, many of whom are seeing improving revenue and interest coverage.
Bin Shi: US-China rivalry likely to continue
Bin Shi, Head of China Equities, warned investors not to be overly focused on a solution to US-China trade issues at the G-20 meeting at the end of June. Bin repeatedly explained that US-China tensions are not just limited to trade tariffs, but are part of a rivalry that will continue and make for lasting market volatility.
Bin also stressed that though the US is pressuring China, the pressure may push the Chinese government to accelerate market liberalization and structural reforms, which could be positive for China in the long run.
Bin Shi: good companies unexposed to trade tensions available at reasonable valuations; All-China approach makes sense
Bin also emphasized that the current environment means it is even more important to focus on finding the right companies. Bin reasoned that there are many companies in China who have very little exposure to US markets and who will continue to do well in a very uncertain environment.
Long-run drivers, like urbanization, ageing and R&D-driven innovation, still remain intact – despite US trade policy pressure – and that means it is possible to find good companies attached to these trends. Additionally, many of these companies are trading at reasonable valuations.
Moving onto strategy, Bin explained that when accessing the best opportunities on China's equity markets, taking an All-China approach to equity investing may be the best strategy. Such an approach flexibly allocates to the best China equity opportunities, whether onshore or offshore, now that China's onshore markets have become accessible to overseas investors.
Gian Plebani and the multi-asset view
Gian Plebani, Portfolio Manager for UBS AM multi-asset portfolios, explained that he's bullish on China assets over a six-to-twelve month time horizon. Plebani cited two key factors: firstly, the improvement in global liquidity as central banks across the world turn more dovish and, secondly, the stimulus that the Chinese government is putting into the economy.
Looking at China's stimulus in more detail. Plebani cited looser monetary policy, infrastructure investments, and tax cuts for companies and individuals, as amounting to strong policy support for the economy. Going further, Plebani pointed to a turning point in leading indicators that he has seen during the past six months, which indicate to him that it is time to start allocating to risk assets.
Trade issues are complicating the outlook though. Hence Plebani is keeping a short-term neutral allocation to overall risk in the portfolio until there is more clarity on immediate trade developments. Plebani favors A-shares because they are more sensitive to the stimulus the Chinese government is providing to the domestic economy. Additionally, high-yield fixed income is a favored asset class, mainly because of improving liquidity conditions in China. Finally, Plebani said he was underweight on the RMB because of the risk of a devaluation in the currency.
What's the outlook for Fed policy?
Entering into a Q&A, our experts discussed their expectations for Fed policy and here are the stand-out quotes:
"We expect one-to-two cuts from the Fed this year. That's good for China because it gives the Chinese authorities room to also cut interest rates, and they have had limited room to do that in the past couple of years. If these cuts happen, we will see a reflation in risk assets both globally and in China."
"We also expect one-to-two cuts from the Fed. However, we doubt the efficacy of rate cuts right now, with interest rates globally at such low levels. We wouldn't be surprised to see the debate about global macro shifting quickly to currency policy."
What’s your expectations for US-China trade tensions in the next 3 – 6 months?
60% of respondents to a live poll of our audience of financial professionals in Hong Kong expected disappointing discussions and partial escalation of US-China trade tensions in the next three-to-six months.
What do you expect?
Take our survey here:
What’s your expectation for US-China trade tensions in the next 3 – 6 months?
This document and its contents have not been reviewed by, delivered to or registered with any regulatory or other relevant authority in any jurisdiction. This document is for informational purposes and should not be construed as an offer or invitation to the public, direct or indirect, to buy or sell securities. This document is intended for limited distribution and only to the extent permitted under applicable laws in any jurisdiction. No representations are made with respect to the eligibility of any recipients of this document to acquire interests in securities under the laws of any jurisdiction.
Using, copying, redistributing or republishing any part of this document without prior written permission from UBS Asset Management is prohibited. Any statements made regarding investment performance objectives, risk and/or return targets shall not constitute a representation or warranty that such objectives or expectations will be achieved or risks are fully disclosed. The information and opinions contained in this document is based upon information obtained from sources believed to be reliable and in good faith but no responsibility is accepted for any misrepresentation, errors or omissions. All such information and opinions are subject to change without notice. A number of comments in this document are based on current expectations and are considered “forward-looking statements”. Actual future results may prove to be different from expectations and any unforeseen risk or event may arise in the future. The opinions expressed are a reflection of UBS Asset Management’s judgment at the time this document is compiled and any obligation to update or alter forward-looking statements as a result of new information, future events, or otherwise is disclaimed.
You are advised to exercise caution in relation to this document. The information in this document does not constitute advice and does not take into consideration your investment objectives, legal, financial or tax situation or particular needs in any other respect. Investors should be aware that past performance of investment is not necessarily indicative of future performance. Potential for profit is accompanied by possibility of loss. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice.
Source for all data and charts (if not indicated otherwise): UBS Asset Management.
© UBS 2019. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.