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Asia selectors name their top China fund picks

Despite turbulence in Chinese equities this year, fund buyers remain convinced that a cautious approach will pay off in the long run.

Chinese whispers

A cautious approach and a focus on new-economy stocks: that seems to be the attitude of fund selectors towards China. Two of the five fund selectors surveyed say they are underweight on China equities for now. ‘Long term, we remain constructive on the Chinese economy, although we are currently underweight in terms of asset allocation,’ says Aman Dhingra of UBP.

A similar sentiment is shared by Christopher Wong at Credit Suisse Private Banking Asia Pacific. ‘Notwithstanding the recent bounce in economic data, we remain neutral on China equities although they are cheap and offer value.

' As Chinese equities are a big part of Asia-centric benchmarks, we recommend investors retain allocation, albeit at a reduced level. Our preferred core Chinese equity fund is a high-conviction, benchmark agnostic portfolio with the ability to invest in onshore and offshore stocks.’

DBS Bank’s Paul Zhuang, meanwhile, is opting for a fund that aims to be benchmark agnostic, and relatively conservative.

'As such, the fund is better able to protect value when overall markets underperform, albeit at the expense of participating less in an upward momentum rally. Will Leung of Standard Chartered notes that his team continues to like China equities despite the lacklustre performance since the start of this year but is focusing on new economy sectors.

‘One of the best ways to leverage this view is to target MSCI China, which has less weighting on old-economy shares,’ he says.

Finally, Ryan Sim of OCBC Bank says the backdrop of accommodative monetary and fiscal policies remain broadly supportive for equities, while the MSCI China PE is still below its 10-year average.

‘Near term, given the market rebound since mid-February, investors may have to be more selective.’

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Chinese whispers

A cautious approach and a focus on new-economy stocks: that seems to be the attitude of fund selectors towards China. Two of the five fund selectors surveyed say they are underweight on China equities for now. ‘Long term, we remain constructive on the Chinese economy, although we are currently underweight in terms of asset allocation,’ says Aman Dhingra of UBP.

A similar sentiment is shared by Christopher Wong at Credit Suisse Private Banking Asia Pacific. ‘Notwithstanding the recent bounce in economic data, we remain neutral on China equities although they are cheap and offer value.

' As Chinese equities are a big part of Asia-centric benchmarks, we recommend investors retain allocation, albeit at a reduced level. Our preferred core Chinese equity fund is a high-conviction, benchmark agnostic portfolio with the ability to invest in onshore and offshore stocks.’

DBS Bank’s Paul Zhuang, meanwhile, is opting for a fund that aims to be benchmark agnostic, and relatively conservative.

'As such, the fund is better able to protect value when overall markets underperform, albeit at the expense of participating less in an upward momentum rally. Will Leung of Standard Chartered notes that his team continues to like China equities despite the lacklustre performance since the start of this year but is focusing on new economy sectors.

‘One of the best ways to leverage this view is to target MSCI China, which has less weighting on old-economy shares,’ he says.

Finally, Ryan Sim of OCBC Bank says the backdrop of accommodative monetary and fiscal policies remain broadly supportive for equities, while the MSCI China PE is still below its 10-year average.

‘Near term, given the market rebound since mid-February, investors may have to be more selective.’

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Buyers' verdict

Christopher Wong, Credit Suisse Private Banking Asia Pacific, Singapore

Notwithstanding the recent bounce in economic data, we remain neutral on China equities although they are cheap and offer value. We are likely to hold this view until we start to see an improvement in earnings expectations.

While the People’s Bank of China may cut rates and the reserve requirement ratio further, the medium- to long-term prospects of the economy will depend on robust structural reforms.

In such an environment, it is likely that China equities will remain range-bound, responding only to extreme valuation metrics and/or event risks including the occasional speculative bouts of risk taking.

As Chinese equities are a big part of Asia-centric benchmarks, we recommend investors retain allocation, albeit at a reduced level. Our preferred core Chinese equity fund is a high-conviction, benchmark agnostic portfolio with the ability to invest in onshore and offshore stocks.

We like its core investment philosophy of minimising downside risk, which we believe will suit the future investment climate, which remains uncertain. Since inception, it has delivered superior risk adjusted returns.

For clients with longer horizons and positive views on structural changes, we recommend a thematic fund that was launched exclusively for Credit Suisse in 2014. It invests in quality Chinese companies that are expected to benefit from policy reforms, and has seven ongoing investment themes including SOE reforms, the ‘One Belt, One Road’ initiative and the growth of services industry.

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Buyers' verdict

Paul Zhuang, DBS Bank, Singapore

Our top pick for greater China equity exposure is the First State Regional China fund. This fund is reasonably concentrated and invests in companies that either have assets in or revenues derived from greater China.

The manager looks to focus on companies that have high franchise potential, strong team integrity and an alignment of interest with shareholders. Although the fund aims to be benchmark agnostic, they tend to be more conservative. As such, the fund is better able to protect value when overall markets underperform, albeit at the expense of participating less in an upward momentum rally.

Currently, around half of the fund is allocated to China with the rest in Taiwan, Hong Kong, Singapore and others. It’s worth noting that the manager of the fund, Martin Lau, and his investment team are core investors in the fund.

Our top pick for mainland China equity exposure is UBS China Opportunities. It comprises 70 holdings, with the majority in H-shares and red chips. There is a strong bias towards ‘New China’ related industries such as consumer, IT and healthcare, which tend to benefit from China’s reforms.

With half of the current portfolio in small caps, the fund aims to derive performance from future leaders in the growth cycle. The fund manager, Bin Shi, has demonstrated a strong ability to leverage support from his team of stock-selection analysts and local experts to generate quality equity research.

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Buyers' verdict

Will Leung, Standard Chartered, Hong Kong

Despite the weak performance since the start of the year as well as many negative comments, we continue to like China equities but focus on neweconomy sectors, including technology and consumer services. One of the best ways to leverage this view is to target MSCI China, which has less weighting on old-economy shares.

Recent data shows Chinese manufacturing sector confidence has returned to expansion territory, while policy stimulus has led to a surge in lending as we witnessed a significant increase in total social financing. The latter may have directly contributed to a reflation of the real estate and steel sectors.

Given signs of policy-induced stabilisation in RMB and China data, we believe policymakers are likely to target easing measures at priority sectors in the coming months, helping China avoid a hard landing and achieve its 6.5-7.0% growth target for 2016.

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Buyers' verdict

Aman Dhingra, Union Bancaire Privée, Singapore

China’s growth has stabilised for now, with credit growth and fiscal policy both being pro-growth. Reforms and debt-for-equity swaps are proceeding too, but the emphasis is on reviving market confidence through policy making. We see China’s growth in the 6-6.5% range for this year.

Long term, we remain constructive on the Chinese economy, although we are currently underweight in terms of asset allocation.

We prefer H-shares to A-shares and turn to active management in this space as we see significant dispersion between stocks, which should allow portfolio managers to generate alpha.

Our preference is for managers who have a long-term time horizon and a bias towards new economy sectors, which we believe should be the long-term beneficiary of the domestic consumption-led growth story.

We are comfortable with funds that carry small- and mid-cap exposures, although we note that during periods of short-term volatility these managers may experience a higher level of volatility than the benchmark.

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Buyers' verdict

Ryan Sim, OCBC Bank, Singapore

North Asia is our preferred region within Asia ex-Japan. China’s efforts to stabilise the economy are paying off, with first-quarter GDP rising 6.7% year-on-year while some economic indicators have also picked up since March.

Strong fiscal support along with faster project approvals since the fourth quarter of 2015 and looser credit conditions have helped stabilise growth.

We have also seen corporate earnings been revised upwards. China’s economic surprise index is now at its highest level in over a year, allaying fears of an economic ‘hard landing’.

With improving property sales and new housing construction, economic growth is likely to be supported into the third quarter. Overall, the backdrop of accommodative monetary and fiscal policies remains broadly supportive for equities, with the MSCI China PE still below its 10-year average. Near term, given the market rebound since mid-February, investors may have to be more selective.

In terms of funds, we look to the Fidelity China Focus fund to reflect our views on the country.

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