Regulatory and property market news hasn't cast China in a particularly flattering light, and equity valuations lag behind those in China. The Swiss private banking house has been adding exposures to the country's bonds and stocks in its Asia-based portfolios run from Singapore.

Chinese equities and valuations have faced a run of adverse developments. They now trade cheaply when set against their Indian counterparts, suggesting that there is eventual potential for China to catch up, private banking group Reyl says.

Rating agency downgrades to Evergrande and Kaisa, both property groups (see the Evergrande story here), for non-payment of debt have ignited fears that cracks are opening up in the world’s second-biggest economy. The Chinese central bank has cut reserve requirements on banks to ease monetary conditions. Earlier this year, Beijing surprised global investors by crackdowns on sectors including technology and real estate.

“China has been a huge issue keeping me busy this year,” Daryl Liew, chief investment officer for Reyl in Singapore, said. “When China started to shift its policy it was from a good base in its economy. Last year China's economy was recovering [from the pandemic] very well.”

Valuations when compared with other Asian markets look attractive, Liew said of China. Asked about the largest asset allocation change Reyl made in the past few months, Liew replied that within the Asian-biased portfolios which his team run from Singapore, the firm has been adding China exposure, both on the equity and bond side as valuations have “become quite compelling.”

One ostensible reason for President Xi’s actions has been to reduce big wealth inequalities – the past two or three decades have seen the wealth gap rise, with a cohort of high net worth and ultra-HNW Chinese individuals becoming a phenomenon in what is, at least in theory, a Communist country. By early April 2020, there were 389 Chinese billionaires, worth a total of $1.2 trillion. Their wealth had grown by almost 9 times, compared with 2 times for billionaires in the US, according to PricewaterhouseCoopers and UBS in 2020. 

“There is a strong….agenda to address inequality and to address significant companies from preventing smaller companies from coming up,” Liew said. 

“The way they [Beijing] have gone about these changes has stung the market and it is not something markets are used to.” (In the West, there is usually consultation and trailing of proposed changes, lobbying and debate before changes take place.) “There has been a severe impact on the technology and property sector,” he said. 

Asia ex-Japan has generally lagged wider developed markets this year. The MSCI China Index is down by about 18 per cent this year. The Hang Seng Tech Index has fallen sharply, down by 28 per cent since January.

Much has been done already
“The good news is that most of the [Chinese] changes have been made already….the technology sector seems to have stabilised. Companies are changing their business processes,” Liew continued. 

The property sector is a concern. “We are still in the midst of a crisis. The particular issue has been engineered by the authorities. Government policy is leading…..to ensure developers did not expand leverage. The authorities were concerned about systemic risk,” he said. Government policy appears to have shifted…the authorities seem to indicate they went too far and may be rolling back reforms for a while. Already, mortgage lending is up….in October, loans rose 43 per cent from a month before. “It looks as if the spigots [of lending] opened up slightly,” he said. 

Turning from China, Liew noted that India has been a “star performer” in equity market terms. As investors shifted portfolios away from China amid COVID and other factors, India benefited, even though several months ago India was hit badly by COVID.

Corporate earnings are improving, having been an issue for a while. India trades at a forward P/E of more than 20 times earnings, about twice the price for equivalent China equities. “Over the past year or so, Indian companies have surprised on the upside. Earnings growth has materialised and firms are managing costs. IT services and pharma have been very much in demand,” Liew said.

A consideration for 2022 is whether India can maintain its performance because there is a lot of “hype” about initial public offerings in the country, Liew said. 

Japan
Japanese equities are cheap, trading about 15 times forward PEs and attractive versus, say, the US, Liew said. And while inflation bothers other countries, it might be a good thing for Japan because the country has sought to reflate in the past few decades of deflation, he said. 

Southeast Asia
Recent purchasing managers’ indices show above-50 level, indicating recovery. The new variant of COVID might knock things back a bit, however. The region has a wide dispersion of vaccination rates and economic performance. “It appears governments want to open up.”

Liew said that gold accounts for about 4 per cent in most portfolios. Cash varies from about 3 to 8 per cent depending on the risk profile of the account.