Riding on China’s Reform Locomotive



Alan Wang
Portfolio Manager –
Managing Director,
Head of Greater China Equities
Principal Global Investors

A fter a sizzling rally in 2017, Hong Kong equity started off 2018 with increased volatility, ruffling the feathers of many investors. But not Principal’s. This year’s MPF Investment Manager of the Year in Hong Kong Equity, the firm makes a convincing case for staying invested in the Hong Kong market. Alan Wang, Portfolio Manager – Managing Director, Head of Greater China Equities at Principal Global Investors, explained the details.

BENCHMARK (BM): In 2017, MPF funds posted the best return since 2009, with Hong Kong equity funds gaining close to 40% on average. What fueled the stellar performance? Do you think these catalysts will remain in 2018?
Alan Wang (AW): Without a doubt, 2017 was a year of broad-based earnings growth. The earnings recovery that started in early 2016 climaxed and surpassed market expectations during the year, driving stock markets higher. We believe the strong earnings growth was attributable to four factors: First, capacity reduction in the steel, coal, aluminum, and other industries in China has given a boost to the profitability of these sectors. Second, the stabilizing Chinese economy and Renminbi helped to refuel Asia’s trade and growth. Third, the return of synchronized global growth. Fourth, companies have learned to adopt stricter capital and cost disciplines during the lean years, which translated into improved asset turnover and margins expansion. Riding on these forces, fundamentals improved and caused re-ratings and multiple expansions across various sectors.
Looking ahead, we expect profit expansion to continue, but at a slower pace in 2018, given the high base in earnings results and valuations last year. Since the potential for positive surprises and earnings growth will be more limited this year, some stocks may even come under de-rating pressures if they disappoint on growth expectations. That said, though, we remain positive on the Hong Kong market, but a more selective approach and a greater focus on finding attractive valuations are warranted.
BM: From a sector perspective, financials account for close to half of your portfolio. What potentials do you see in this sector? What sectors do you favor in 2018?
AW: We have turned slightly more positive on the Chinese banking sector, which is starting to benefit from China’s economic recovery. As the debt-servicing ability of corporate borrowers improved on the back of reinvigorated economic activities, we see the potential for Chinese banks to chalk up stronger earnings that the market is underestimating right now.
Besides the economic revival, supply side reform is another catalyst for Chinese banks. The reform, which targets to reduce overcapacity in raw material producers, has unleashed a healthy reflation in upstream and midstream sectors, thereby improving the credit quality of banks. The trend is proving beneficial to the materials and energy sectors, too.
We maintain a relatively constructive view on China. Our biggest overweight positions are in the consumer discretionary, information technology, and energy sectors due to favorable government policies, sustainable growth drivers, and underleveraged consumer segments.
BM: Under China’s ongoing market liberalization, restrictions on foreign ownership in financial firms are set to be further loosened. What are the implications of this on your portfolio and its 20+% exposure to H shares?
AW: We believe this policy move paves the way for more positive developments in China’s financial system. Although more active participation by foreign capital will make the system more competitive and stable, these changes will only take place gradually over the next three to five years. Therefore, in the near term, we don’t expect to see any meaningful impact.
In the H-share space, the government’s focus on deleveraging and clamping down on speculative activities are positive for China’s financial institutions. If continued next year, these measures will likely reduce the risk premia attached to these stocks. As always, we will continue to focus on the profitability, fundamentals, and valuations in our decision-making.
BM: Most MPF schemes and investment platforms in Hong Kong are increasing Hong Kong ETFs offerings. Do you see this as a threat to managed funds?
AW: Good question. Calling the rise of ETFs a threat may be an overstatement because of the fact that passive investing is not yet a long-term winning strategy in many markets. Moreover, the cost advantage of passive strategies over their active peers is not as significant as perceived. Another problem with passive ETFs is the dominance of large-cap stocks in their tracking indices. The highly concentrated passive portfolios are subject to a higher degree of volatility. More importantly, skillful active management also plays a role in risk mitigation, such as detecting governance abuses that could evade the loopholes of passive investing. BM





過2017 年的大豐收後,香港股市於2018 年初波動加劇, 觸動了不少投資者的神經。但信安與眾不同。榮膺年度最佳強積金投資管理大獎(香港股票類別)的信安,以成績帶給投資者信心繼續留在香港市場。信安環球投資大中華區股票投資主管及基金經理王曦,闡述箇中因由。

《指標》:於2017 年,強積金基金錄得自2009 年的最佳回報,香港股票基金更平均上揚近四成。究竟是甚麼因素帶動此佳績?這些因素會否於2018 年持續?
王曦:無可否認,2017 年企業盈利出現廣泛增長。企業盈利復甦始於2016年初,並於去年超越市場預期,將大市推高。我們相信強勁的盈利增幅可歸功於四個原因:首先,內地鋼鐵、煤炭、鋁金屬和其他行業產能減少,推動了這些行業的盈利能力。第二,內地經濟及人民幣穩定也帶動了亞洲貿易及增長。第三,環球重拾同步化增長。第四,企業於缺乏資金期間學會了採用更嚴格的資本和成本規則,改善了資產收益及增加邊際利潤。基於以上種種因素,促成了基本條件的改善、重新評級及各行各業的擴張。
《指標》: 從行業分布的角度看,金融業佔你的投資組合接近五成。你看到這行業有甚麼潛質?於2018 年你喜歡哪些行業?
《指標》:隨著中國持續市場自由化,政府對金融機構的外資擁有權限制將進一步放寬。這對你在投資組合分配以及持有逾兩成H 股有甚麼影響?
王曦:好問題。將交易所買賣基金的興起視作威脅可能略為誇張,因為被動式投資在許多市場中仍未稱得上是長勝的策略。另外,被動式投資相對於主動式投資的成本優勢,並非如想像中明顯。而被動式指數投資基金的另一隱憂,是其追蹤指數往往受到大型股所主導。而當被動式投資組合的成份高度集中,其所冒的風險將會更高。最重要的是,精明且富經驗的基金經理在主動式管理中能發揮減低風險的作用,例如基金經理可觀察到企業管治問題並因而避開,這是被動式管理無法做到的缺憾。 BM