Unleash the true growth potential of China

Despite ongoing regulatory reset in some sectors such as internet and education in China, we believe Chinese equities offer some of the most attractive opportunities globally. Wenchang Ma, Portfolio Manager at Ninety One, discusses the benefits of investing in Chinese equities and why to take an ‘all-China’ approach.

Sep 16, 2021

5 minutes

Wenchang Ma
Despite ongoing regulatory reset in some sectors such as internet and education in China, we believe Chinese equities offer some of the most attractive opportunities globally. Wenchang Ma, Portfolio Manager at Ninety One, discusses the benefits of investing in Chinese equities and why to take an ‘all-China’ approach.

Q1 What are the benefits of investing in Chinese equities?

China possesses the world’s second-largest equity market1 and Chinese equities we believe currently offer some of the most attractive revenue, earnings and cashflow growth opportunities globally.

Despite ongoing regulatory reset in some sectors such as internet and education in China, we remain constructive on areas and sectors that have positive supply-demand dynamics and policy support. These can be found in selective financials, materials, and renewable energy plays such as wind, solar and the EV supply chain.

Taking an active approach through a separate allocation to China has the potential to improve the diversification, resilience and performance of your portfolio.

Q2 Why take an ‘all-China’ approach to invest in China?

In order not to miss out on the breadth of opportunities available in China, we believe investors should take an ‘all-China’ approach. This creates a universe of over 7,000 stocks, equating to approximately US$ 18 trillion of market cap, accessible to investors2.

A holistic approach to investing in China

A holistic approach to investing in China

ADR=American Depository Receipt

Taking an ‘all-China’ approach, in our view, provides the broadest opportunity set across China’s diverse economy and allows the flexibility to select the best Chinese stocks irrespective where they are listed and focus instead on the underlying assets relative to the broader China universe. We believe this maximises the opportunity for alpha generation.

Q3 How to capture the alpha potential in the Chinese equity market?

The onshore universe (China A-shares) is made up of approximately 4,500 stocks2 . It is less efficient than developed markets. This is largely due to the dominance of retail investors. Their trading behaviour and short-termism tends to generate pricing inefficiencies that can improve the scope for experienced bottom-up active managers to add value.

We believe that this inefficiency creates compelling long-term alpha opportunities for investors using a disciplined bottom-up stock-picking framework, which invests on the basis of both corporate fundamentals and behavioural finance.

Q4 How has the Ninety One 4Factor process worked in the China market?

China’s market inefficiency and its greater propensity for bias can create an array of potential opportunities for active investors. In this context, we believe our 4Factor investment process that seeks to take advantage of mispriced opportunities created through behavioural bias is especially relevant in China. Our framework comprises a proprietary screening tool, evaluating both behavioural and traditional finance metrics, combined with deep fundamental analysis.

4Factor investment philosophy

4Factor investment philosophy

“We search for high quality, attractively valued companies with improving operating performance that are receiving increasing investor attention”

We believe this balance of traditional and behavioural finance is especially relevant in China. By applying this approach to both onshore and offshore listings, the portfolio managers have the ability to capture the best available value, liquidity and risk characteristics for the companies held.

Q5 What measures does Ninety One take to mitigate the risks of investing in Chinese equities?

We distinguish between the types of risk we are willing to assume and those we attempt to mitigate. Specifically, we want the majority of risk in the portfolio to be derived from stock-specific decisions. Conversely, we attempt to dampen portfolio risk from other sources such as market, currency, style, sector and country.

To achieve this, we leverage on the expertise of our local team and our disciplined investment process to select stocks based on in-depth fundamental research. We also work collaboratively with our independent investment risk team who use a variety of industry recognised risk systems to monitor portfolio risk characteristics. These include a proprietary style analysis customised for our multi-factor approach, as well as a statistical decomposition of portfolio tracking error to identify and avoid any unintended intensification of risk.

 

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1 Source: Bloomberg, market cap as at 31 July 2021.
2 Source: Wind, Bloomberg, 31 July 2021.

Authored by

Wenchang Ma
Co-Portfolio Manager, All China Equity

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