Investment

Chart of the Month – The case for good active management in China!

by Cedric Dingens

The case for good active management in China!

Source: Notz Stucki

One of the big winners of the COVID-19 pandemic appears to be China, which has seen its economy grow by almost +3% in 2020 and is expected to grow between +8% and +9% in 2021. The continued appreciation of the RMB versus the USD is the best evidence of it. Contrary to what is happening in the other world large economies, this year’s Chinese macro policy should be balanced with a focus on demand-side reforms and an objective to boost consumption through employment, social security and income distribution.

Strong real GDP growth in 2021 and the possibility to see some reflation pickup would be beneficial to corporate profitability, particularly in the consumer and industrial sectors. Earnings will be the key driver for equity returns and even if equity valuations are quite high on an absolute basis, they look reasonable compared to global peers and particularly to the US.

The China A-Shares market, which is the 2nd largest equity market globally but still under-represented in global indexes, is the place for structural growth opportunities. Expected winners are to be found among industry leaders, companies surfing on the mega trends of the post-pandemic world and sectors which should benefit from the 5-year plan in terms of policy support and reform push (China wants to become self-dependent!): technology, innovation, digitalization, new infrastructure, green investments and domestic demand.

The combination of this strong macroeconomic backdrop and financial market reforms could bring significant reallocation flows to China A-Shares. With higher market inefficiencies and a high retail investor participation, Chinese equities are a fertile environment for alpha opportunities. The chart above shows the rolling 3-year performance of the MSCI China Index, the EurekaHedge China Equity Long/Short Index and of our selection of China Equity Long/Short managers within a global multi-manager fund since 2015 (each manager is kept at the same weight to avoid biases) over the last decade.

Conclusions:

  1. equity long/short investing in China is a sustainable source of alpha over time.
  2. a good selection of talented manager in this category provides real added value.

With an expected launch date for the end of March, our new China Multi-Manager Fund will be largely inspired by this selection of equity long/short managers and should offer diversification benefits to a typical global equity portfolio.

 

 

 

 

 

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only.

References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. Notz, Stucki provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document.

This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the Notz Stucki Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer.

 Additional information is available on request.

© Notz Stucki Group

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