Let the risks play out says world’s largest China equity manager

Bin Shi, manager for the UBS China Opportunity strategy talks about the trade war and when he would put more cash to work.

31 May 2019

As a portfolio manager, our job is to generate returns for our clients

Bin Shi, Head of China Equities

This is one of the reasons why he and the China equities team look to invest in high quality companies as over time, it can help achieve investment objectives.

Bin explains that’s why he keeps cash in the portfolios he manages. The cash would be useful when the market underprices certain risk factors. However, he clarified that he is not looking to time the market.

Rather, his aim is to make sure that every stock he owns can generate a return for investors in two to three years or even 10 years down the road.

Let the risks play out

If the situation is uncertain, he would rather let the risks play out and wait for the market to normalize.

And things are uncertain now. “It’s a dicey situation”, says Bin referring to how trade talks between the US and China are (not) progressing. In the recent weeks, markets are increasingly more sensitive to the tit-for-tat battle between the two superpowers which could extend over a prolonged period.

As of 30 May 2019, markets have fallen 13% from the beginning of the month.

“We have little control over macro risk. But that doesn't mean we sit back and just watch the situation unfold. Deal or no deal, the team and I think about the companies we invest or we will invest in everyday. Our portfolios comprise quality companies with strong management that should be able to withstand volatility. However, given little clarity in the horizon, we are de-risking the portfolio. This means reducing our allocation to companies that are more richly valued,” says Bin

Bin does not rule out more volatility in the next half year or so. “The recent sanction of the US on Huawei Technologies (Huawei) is not helping matters. Huawei is one of the key leaders in the latest 5G mobile technology. ”

Both the US and China are head-to-head in competing for technology leadership and Bin believes that a stalemate is not in either party’s interest. It is not unlikely for some form of middle ground to be reached but the negotiation path will not be straight forward or immediate.

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UBS China portfolios geared towards domestic consumption

Trade war has become top of mind for many investors. However for Bin, who runs the largest China equity fund, it’s ‘business as usual’.

Bin explains that China is a big domestic market and many large businesses are making their fortunes in their home ground. The holdings in our UBS China portfolios are also geared towards domestic consumption.

So instead of clouding his mind with macro developments, he puts his energies on how companies are creating their next dollar of revenue.

“It’s all about a company’s growth”, says Bin and cites how companies with good strategic vision like Tencent have withstood the internet bubble, subprime crisis and Fed rate hikes to grow by more than 400 times since its initial public offer in 2001.

For managers like him who focus on company fundamentals, adverse market development is not all bad news.

Volatility is not necessarily bad. It’s give us opportunities to generate alpha than if everything moves in a straight line.

When markets are choppy, Bin and the China equity team take the chance to invest in companies at better prices.

Slowdown in reforms would be bigger risk

It may be some time before the US and China comes to an amicable agreement on the trade front. While this impasse is a risk for China equities, Bin would be more alarmed if China reverses or slow down its market reform policies.

However, Bin believes that the government is committed to opening up the China economy further judging from their moves. He used the example of UBS Asset Management’s subsidiary in Shanghai to illustrate this. Previously, foreign entities are not allowed to have full control of its subsidiary in China but since December 2017, UBS Asset Management has been running its 100% owned outfit in Shanghai. These signs point to the government’s intent to carry on with its reform process.

Bin Shi, Head of China equities at UBS Asset Management is also the portfolio manager for the UBS (Lux) Equity Fund – China Opportunity Fund. The Fund has US$ 7.3 billion in assets under management and is the largest China equity fund globally (Source: Morningstar, 30 April 2019.)

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