Opportunities in China: Perspectives from a local investor
Global Investment Insights
with Dr Henry Zhang, Chief Investment Officer, High Hope Wisdom Capital
Henry is the Chief Investment Officer of High Hope Wisdom Capital, a China based hedge fund. Previously, he spent more than six years with Aware Super, most recently in the capacity of Senior Investment Analyst.
With his personal understanding of Australian institutional market and perspectives from the ground in China, Henry was able to shed light on some of the key dynamics playing out in China that make it an attractive investment destination for foreign capital and how best to access the opportunity set.
Since relocating back to China in 2018, Henry’s primary focus has been on building out a multi-asset, multi-strategy and multi-manager investment platform and solution for the Chinese capital market that can find a home for some 80 trillion RMB of domestic residents’ savings. Beyond that, Henry and his team are developing a full investment solution for institutional investors that enables them to transition their portfolios from a predominantly fixed income allocation, to a more diversified portfolio. Another big focus for Henry is the development of a quantitative investment strategy in equities (long only and market neutral) and futures/options markets that seeks to capture alpha systematically. “Since I moved back to China, I am astonished at the opportunity to extract alpha and how effectively a quantitative strategy can be deployed to capture this alpha systematically”, Henry remarked.
What trends, innovations and thematics are occurring that support the case for global institutional investors to allocate to China?
The first is the integration of China’s capital markets into global markets. The inclusion of both equities and bond markets is moving fast. The size of China’s assets in indices and their uniqueness justifies a dedicated allocation as a separate asset class.
As it pertains to the equities market, there are a number of elements which cannot be ignored, namely:
Given where valuations sit across developed markets, particularly the US, an comparable asset in China is relatively more attractive.
The inefficiency of the market due to the large presence of retail investors who often tend to overreact to sentiment, creates alpha opportunities for sophisticated investors. Investors often joke that “the Chinese equity market has the worst beta, but the best alpha in the world.”
The transformation of the economy from a lower end manufacturer and exporter, to a consumption driven market with 1.4 billion consumers, means the sky is the limit.
In the last 20 years, the rapid growth of the economy has seen a large pool of university graduates enter the labour market (on average 6 million students graduated every year), injecting talented professionals across industries. For example, Alibaba’s success can be attributed to a large pool of engineers and computer scientists having been supplied to the labour force that have enabled it to prosper.
China is fast becoming an innovator and leader in technology, on a global scale. With support from government and industry alike.
Combining these key trends of talent, rising wealth, technology, hardworking ethic, all of which are further supported by government, makes China an unmissable market for any investor, particularly for sophisticated institutions.
In terms of the bond market, China’s 10-year bond yield is currently at 3.3%. Combined with a strong growth economy and a credible government, the market offers an attractive yield and carry, particularly in today’s world where zero and negative yields are a norm.
What advice do you have for investors who are unfamiliar with investing in China?
Although the market offers deep and rich opportunities it also comes with its share of risks. Similar to when hiking in unfamiliar terrain, Henry advises that investors ought to seek out a trusted, local guide who knows the landscape well and can assist them in avoiding the pitfalls and getting lost.
China is a market that can be fundamentally materially different from others. Many features may exist that investors are not familiar with, but they exist for a reason. Therefore, investors need an open mind and a willingness to understand and assess anything that may be different from the norm.
Find a good partner who knows the market well as a first step, before making an allocation, and preferably a partner who is able to provide you a full solution.
Take an active interest in the market, observe it and learn about it, before participating as an investor.
Make a progressive investment over time and ensure that it is flexible to enable you to pivot as needed to exploit the volatility of the market.
Build a good working relationship with the regulator in China.
What are the key concerns global investors cite that deter them from making an allocation to China?
Generally, I feel these can be grouped into a few key overarching themes:
Uncertainty due to lack of understanding of the market.
Communication barrier due to language differences and the different culture, which has laid some mistrust in investors’ attitudes.
The generally accepted notion that the market is risky.
Reports by media, both Chinese and Western, which has added to concerns, rather than appeasing them.
Some of these are real concerns investors should be aware of, but most are perceived. The market in China is generally difficult to understand. During my time at Aware Super (previously First State Super), I dealt with this market extensively and lead on the QFII investment, yet I found in my first six month after starting my new job in China that I went through a steep learning curve and I am still learning today. The Chinese market is dynamic with sector shifts, new regulations, innovation, among other things, and this constant evolution, requires investors to also evolve to keep pace.
What type of global institutions participate in Chinese investment markets and what is the best way for global investors to access opportunities?
The global asset owners participating in both listed and private markets of China have predominantly been US and European investors. However, the barriers to investing in China are that have previously existed are no longer there since China made the bold move to open up the market to global investors. The connect market allows investors to easily invest in equities, while the lowering of QFII now means that sophisticated institutional investors can easily move into the market and invest locally.
If you were allocating capital to China, where do you see greatest opportunities over the next three years and why?
China offers astonishing alpha opportunity, but a few ideas I would highlight are:
A quant strategy offers a unique market neutral strategy that hedges out the market beta and delivers attractive alpha after hedging cost, offering a stable and absolute return (usually around 10-15% pa), particularly attractive to investors who are averse to volatility.
Looking at where equity valuations sit, a long only strategy with some flexibility to tactically adjust the beta exposure could potentially generate about 20-30% pa returns over the next three years.
Finally, Chinese growth stocks are priced similarly to US stocks, so over the longer term I would expect more balance between value and growth to be restored. But in the next three years, I expect a few companies in consumer, high-end manufacturing, biotech, telecom and new energy cars to emerge as world leaders, offering attractive opportunities for those who invest early and patiently.
Disclaimer
All information contained within this publication is general advice only, as the knowledge levels and needs of all individual and corporate investors vary greatly this publication should not be used solely as a decision-making tool, further opinions and information should be sought before making an investment decision. It is the recommendation of Global Investment Institute (GII) that you seek the opinions of a fee-for-service, independent investment adviser before making any investment decision.
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