Reyl Shows Chinese Equities, Bonds Some Love

Tom Burroughes

13 December 2021

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 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 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.