Global investors flock to China, undeterred by trade war

Trade wars and softer growth are unlikely to dissuade global investors from diving into the world's second-largest economy as they seek better returns, participants in the Reuters Global Investment Outlook 2020 Summit said this week.

Although economic growth in China has slowed to its weakest pace in nearly 30 years, and recent bond market ructions have pointed to uncertainty over the outlook for policy easing, the country still promises opportunity in a world of negative interest rates.

"China is one of the few places investors can generate decent returns," said Richard Pan, the head of international business at China Asset Management Co (ChinaAMC).

Richard Bernstein, chief executive of Richard Bernstein Advisors LLC and a former Merrill Lynch & Co chief investment strategist, agreed, noting that China's slowdown is belied by "accelerating leading indicators."

"Because of what's happening in trade, the Chinese government has injected massive amounts of monetary and fiscal stimulus into the economy. To say it's not going to work is amazingly bearish," he said.

"We are very overweight Chinese equities," he added. "Chinese equities are about 3% of the global benchmark, and we're at about 12%."

Global index provider MSCI said on Thursday that mainland Chinese stocks, or A shares, would rise to a weight of 4.1% in the MSCI Emerging Market Index, up from 2.55% currently.

Mark Konyn, chief investment officer at AIA, said he didn't expect Chinese equities to match this year's gains in 2020, but "it will be a reasonable year."

The blue-chip CSI300 index .CSI300 has gained around 31% in 2019, making it the world's best-performing major index.

Konyn said that he expects that the trade war between Beijing and Washington, which began early last year, will have little long-term effect on China's commitment to opening its markets to more foreign investment.

"If you take a step back and say 'has the commitment to financial liberalization been impacted by the trade dispute?', I think the conclusion is 'no, that commitment is still very much in place,'" he said.

King Au, president of Hong Kong-listed asset manager Value Partners Group Ltd (0806.HK), said his firm is expecting a sustained rally in Chinese stocks in 2020, calling the country's equities "under-owned (and) under-researched."

"For institutional investors, especially those long-term sophisticated investors, they definitely realize that they need to increase their China exposure from 'nice to have' to 'have to have,'" Au said.

Au said that structural reforms and liquidity are driving momentum in China's equity market. Although he sees opportunities across A-shares, Au highlighted technology, healthcare, education and shares benefiting from consumption upgrades.

ChinaAMC's Pan also sees opportunities for investment in the high-end consumer market despite negative external factors. "We don't see any material impact on Chinese consumption power from the trade war," he said.

Technology investment pioneer Glenn Hutchins, who co-founded private equity firm Silver Lake Partners in 1999 and now works through North Island, a family office, said he is betting on high growth outside the United States in 2020, especially in emerging technology companies in China.

Silver Lake invested in Alibaba Group Holding Ltd (BABA.N) in 2011, and Hutchins said he is still an investor.

"There's a huge growing market and a big addressable market by technology companies (in China)," he said.

But Hutchins says that although Chinese Internet stocks are "cheap," he does not invest in them. And ChinaAMC's Pan said that Chinese technology stocks remain vulnerable to US sanctions.

Retail investors in China burned by previous market crashes and looking to move money out of stagnant real estate and low-yielding wealth-management products are increasingly turning to passive instruments, said David Xu, head of indexing and quantitative investment at Hua An Fund Management Co.

Xu, who says China's index-tracking mutual funds have the potential to jump tenfold in the next decade, said a rise in passive investing has driven a boom in ETFs as asset managers rush to launch new funds.