As world markets, especially U.S. markets, tremble on surging cases of the coronavirus, there’s one market seeing investors return: China.
The infection rate of coronavirus has slowed in China, and there appears to be a growing appetite among fund managers to start buying Chinese assets again.
Pinebridge Investments, a New York-based firm, is going “all in.” The firm had total assets under management of $101.3 billion as of the end of last year — including $25.5 billion in stocks and $64.3 billion in fixed income.
“We have recently boosted China A shares from a small single digit starting position to a low double digit weighting,” Michael Kelly, global head of multi-asset at Pinebridge, told CNBC over email. “As a result of COVID-19, the West is now seeing plunging economics through at least (the second quarter), while the East, led by China, is already full of” companies that are showing recovery.
“April macro data will clearly have a better tone for China,” he said, “while beginning a plunge in the West of unknown duration.”
Pinebridge is not alone. UBS Asset Management in late February launched a new Exchange-Traded Fund (ETF) that gets it into China’s onshore stock market. ETFs track benchmarks in the same way mutual funds do, but they trade more actively like stocks.
While not commenting on the launch of the ETF, Kelvin Tay, regional chief investment officer at UBS Global Wealth Management, said he’s upbeat on China. Coal consumption and property sales are almost at 80-90% of prior levels, he said, and the labor market is becoming more active.
“An estimated 40% of MSCI China’s stocks are technology-related,” he said in an email interview, referring to an index that tracks stocks trading in Shanghai and Shenzhen. “These sectors are far less vulnerable to the economic slowdown as a result of the COVID-19 pandemic. We expect the virus to have long term implications in areas including US-China trade, global supply chains, digital infrastructure, and offline to online migration.”
China’s largest market is China … Clearly China’s exports to the West will see no uplift for a while, yet a slow and steady pick up in local demand is capable of bridging the gap.
Global Head of Multi-Asset, Pinebridge Investments
China President Xi Jinping gave strong pro-growth signals at last Friday’s Politburo meeting, Goldman Sachs said in a note.
Goldman’s report said Chinese policy is focusing on stimulating demand while stabilizing employment, trade, financial markets and foreign capital.
“China’s largest market is China,” said Kelly of Pinebridge. “A high savings rate will enable recovery for some time. Clearly China’s exports to the West will see no uplift for a while, yet a slow and steady pick up in local demand is capable of bridging the gap.”
Analysts see opportunities in infrastructure-related themes in China, such as 5G connectivity, semiconductors and healthcare. China’s government spending, at 1% of gross domestic product, lags the U.S. rate of 10%. But China is expected to do more in terms of fixing disrupted supply chains.
Not only Pinebridge’s equities team, but also its fixed income team is also buying China.
Arthur Lau, co-head of emerging market fixed income, said he likes state-owned, investment-grade companies in utilities and financials, with a defensive position in commodities.
In the riskier, high-yield space, where companies are seen as more likely to default, Pinebridge prefers the property sector. With loans available at cheaper rates, the flow of money is seen continuing within that sector.
And then there’s the yuan
Rob Subbaraman, global head of macro research at Nomura, believes China’s yuan will become one of the world’s important reserve currencies. “It is only a matter of time,” he said in an email.
The coronavirus pandemic could speed this process, as could the People’s Bank of China if it follows through on its plan to become one of the first central banks to introduce a digital currency.
But all that said, China is not out of the woods just yet.
“There are still multiple risks and challenges, including a second wave (of COVID-19) as the lockdown eases,” Subbaraman said.
Other risks he cited include a slump in exports of at least 30% year-over-year in the second quarter, rising debt defaults — especially among property developers that have less access to offshore U.S. dollar funding — and the deepening geopolitical rift between China and the United States, which could lead to an escalating economic war.