Carry is king: China multi-asset investing

China's economy has seen a surprisingly strong V-shaped recovery, which has been already been evident in the real economy.

Indicators such as fixed asset investment and industrial production have returned to trend levels seen before the COVID-19 outbreak, supported by infrastructure development. Real estate has also been a bright spot.

Elsewhere, there have been weak spots in retail and exports. Despite strong online retail sales, contact-heavy service sectors, like cinemas and restaurants, remain below trend and may need a vaccine solution to COVID-19 to return to pre-pandemic levels. Export sectors have suffered from a slowdown in global trade.

The key question is whether the growth pace seen in the headline economic indicators can be sustained Looking ahead, PMI and Li Keqiang index indicators indicate the pace of recovery is likely to slow, and credit conditions are normalizing, with China's monetary authorities supplying more measured stimulus.

Ultimately, growth in the next 6-12 months will most likely be either at back to trend, or slightly below trend.

Credit

The most important risk factors to markets remains the status of the Phase 1 US-China trade deal. US moves to put more Chinese companies on the restricted entity list are likely, as well as potential sanctions against small Chinese banks. 

However, the Phase 1 trade deal would likely stay in place because the existing deal is a positive one for the US agriculture sector, which is a key constituency in US politics.

The Chinese government has committed to substantial purchases of US farm products, like soybeans, and we doubt the US side would want to jeopardize this in the lead up to the election.

From an asset allocation perspective, Gian remarked on the very strong performance in China equity markets recently, particularly compared to global equity markets. Gian explained that the recovery in the economy may already be priced into the market.

Given the prospects for a moderation in China's economic recovery, Gian remarked that 'carry is king' and is currently overweight credit, with particular emphasis on China high yield asset classes, where he sees strong risk-adjusted returns.

We remain quite positive on the RMB for three key reasons: firstly, we see weakness in the USD, secondly, we believe that China has handled the COVID-19 outbreak quite well and growth is reverting to trend- or close to trend, and finally that we expect structural flows into RMB assets as China opens up its financial markets and the index inclusion process continues.

In the portfolio context, given the risks from the US/China situation, we are hedging out some of our exposure in the portfolio.

We believe now is the time to be more nimble within classes and indices and focus on relative value trades, such as onshore vs offshore allocations.

Additionally, this environment makes carry particularly attractive, which explains our current preference for China credit.