Quintet Private Bank has become more positive on Asia, both strategically and tactically. In the short term, the bank said that it believes that Asian high yield bonds currently offer better risk-adjusted returns than either China or Asian equities. The bank’s Bill Street said this on Tuesday during an outlook presentation and in a reply to additional questions from Fondsnieuws, Investment Officer Luxembourg’s sister publication.
In Quintet’s strategic asset allocation, the Asia portion - and therefore China - has increased. “We allocate at least 10 percent of our portfolios to Asian equities,” said Group CIO Street.
Tactically, Quintet has increased its position in Asian high yield bonds. Chinese equities look attractive, but exhibit very high volatility, Street argued. “In doing so, Asian high yield bonds are diversified but still offer significant exposure to Chinese credit, with 40 per cent of the index.”
Taking a contrarian view, Street agreed with the praise for China. “We had that position before the news surrounding Evergrande came out, and expanded it further over the summer as markets became disrupted.” On Evergrande itself, Street said, Quintet has no idiosyncratic exposure to Evergrande. “But it is the largest issuer in the largest sector in China - so the effect does ripple through.”
Regulation and real estate events have pushed credit spreads so high that, as far as Quintet is concerned, investors are more than compensated for the risk of default. “We do not think that the high priced debt level or even Lehman moment will materialise,” he said. “Instead, we see a slow normalisation and expect a further recovery in the first quarters of 2022.”
Through a different lens
Chinese credit and equity markets are in bad shape this year. Concerns are mounting after problems with Evergrande’s payment obligations and government intervention in Chinese tech companies is also hurting share prices. “We see it through a different lens,” explained Street. “The Chinese capital market is maturing, becoming more transparent and more rule-based. That, combined with better management of Chinese companies, makes it possible to make good investment choices.”
Although analysts say the Chinese economy is cooling faster than expected, economist Daniele Antonucci stressed that China is still on track to become the world’s largest economy. “We don’t know when, but it is an important economy and a major driver of global economic growth,” she said. “In doing so: China is becoming more predictable, more credible. We think that as time goes on, that will improve even more.”
The economist also mentions the rapid growth in China, which is giving way to balanced growth. “Yes, there is debt to be paid off and there are negative developments in the short term, but we think the outlook will ultimately be positive.”
Street explained his overall view as the year ends: “And growth is still strong. Negative returns in 2021 are offset by positive policies and growth: a really good environment for investors, especially given the valuation discounts that are currently in place. Various sectors and industries will offer opportunities and the sustainability agenda is coming onto the radar at a rapid pace.”