Transcript Fiducian - Perfecting Investment Portfolios Conference

Perfecting Investment Portfolios
April 2016
PREMIUM CHINA FUNDS MANAGEMENT
Jonathan Wu - Associate Director | Head of Distribution and Operations
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Disclaimer
This presentation is not financial product advice and is intended to provide information only. It does not take into account the
investment objectives, financial situation or needs of any person. You should assess whether the information is appropriate for
you and consider talking to a financial adviser before making an investment decision.
The information is taken from sources which are believed to be accurate but Premium China Funds Management accepts no
liability of any kind to any person who relies on the information contained in the presentation. Unless expressly stated none of
the information should be taken to be a recommendation.
Premium China Funds Management is the trading name of Premium China Funds Management Pty Ltd ACN 113 856 214,
Australian Financial Services Licence No 291570.
Information in this presentation is believed to be accurate as at 31 March 2016.
Equity Trustees Limited ABN 46 004 031 298 (EQT) is the issuer of units in the Premium China Fund and Premium Asia Income
Fund. Macquarie Investment Management Limited ABN 66 002 867 003 AFS License 237 492 (MIML) is the issuer of units in the
Premium Asia Fund and Premium Asia Property Fund. Investors should consider the Product Disclosure Statement (PDS) relating
to the Fund in deciding whether to acquire or continue to hold units in the fund. The PDS is available from
www.premiumchinafunds.com.au.
MIML is not an authorised deposit-taking institution for the purposes of the Banking Act (Cth) 1959. MIML’s obligations do not
represent deposits with, or other liabilities Macquarie Bank Limited does not guarantee or otherwise provide assurance in respect
of the obligations of MIML.
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Some Questions to Ask You...
• Do you base your investment decisions for
New Zealand equities based on GDP growth?
• Does an unrated bond equate to a bad bond?
• Have you thought about who is calling for
the collapse of the Chinese economy?
• When was the last time you invested for your
clients at a low point in the cycle?
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A Tale of Two Cities
Correlations between Stock Indices and GDP movements
0.6
0.5
0.4
0.3
0.2
0.1
0
-0.1
-0.2
-0.3
US
UK
Japan
South Africa
Source: Gerstein Fisher, 1 Jan 1993 to 13 Dec 2010
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Brazil
China
Mexico
Korea
Content
o Market Volatility
o Transition Economy
o Investment Outlook
o Seeking Yield
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Market Volatility
Chinese Share Classes
A-Share
•
Company Profile
Incorporated and
based in Mainland
China
Stock Exchange
•
•
Availability
Currency
•
•
B-Share
•
Incorporated and
based in Mainland
China
•
•
Shanghai
Shenzhen
Chinese residents
Qualified Foreign
Institutional
Investors (QFII)
RMB
Shanghai
Shenzhen
H-Share
•
Incorporated and
based in Mainland
China
Red Chip
•
Based in Mainland
China, but
incorporated
internationally
•
Hong Kong
•
Hong Kong
•
No resident
restrictions
•
No resident
restrictions
•
Non-Chinese
residents
• Residents with
appropriate
dealing accounts
USD/HKD
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HKD
HKD
Mainland Volatility Not Unusual
Rank
Start Date
Change (%)
Length (Days)
1
7-Dec-1993
-67.3
162
2
5-May-2008
-49.6
96
3
11-Sep-1992
-49.3
45
4
16-Oct-2007
-49.2
125
5
25-May-1992
-45.1
57
12-Jun-2015
-37.5
55
22-Feb-1991
-21.6
58
…
…
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Source: CSI300, Wall Street Journal, Morgan Stanley Research; Google Finance, Data from 12 June 2015 to 31 August 2015
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Policy Misstep
5% circuit breaker
7% circuit breaker
Source: Bloomberg
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Valuations Most Attractive
Forward P/E Ratio (x)
20
15
10
5
0
Source: Bloomberg Consensus Estimates, March 2016
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Price-to-Book at Crisis Levels
HSI
Now
(30 Mar 2016)
1997 Asia Financial Crisis
(13 Aug 1998)
2003 SARS
(25 Apr 2003)
2008 Subprime Crisis
(27 Oct 2008)
2011 European Credit Crisis
(4 Oct 2011)
Index
P/B
HSCEI
Index
P/B
20,803
1.11
8,979
0.91
6,660
0.93
N/A
N/A
8,409
1.28
2,088
0.87
11,015
1.07
4,990
1.06
16,250
1.18
8,103
1.19
Source: Bloomberg, March 2016
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Property Stocks Attractive
Year
2016
2016
2016
2016
P/E
10.2x
4.0x
8.4x
3.9x
P/B
1.4x
0.8x
1.1x
0.6x
EV/EBITDA
18.9x
6.5x
17.1x
5.4x
ROE
10.2%
21.5%
10.6%
18.3%
D/Y
4.8%
5.4%
5.2%
9.4%
Source: Bloomberg; Factset, March 2016
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Transition Economy
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What’s Good and What’s Not
2014
2015
2016E
Real GDP (YoY%)
7.3
6.9
6.5
FAI (YoY%)
15.7
10.0
9.5
Exports (YoY%)
6.1
-2.8
1.7
Consumption (% of GDP)
50.2
66.4
CPI (YoY%)
2.0
1.4
1.7
Retail Sales (YoY%)
12.0
10.7
10.8
Money Supply (M2, YoY%)
12.2
13.3
11.8
Interest Rate (Lending, %)
5.6
4.35
Reserve Requirement Ratio (%)
20
17.5
Manufacturing PMI
50.1
49.7
Non-manufacturing PMI
54.1
54.4
Source: Bloomberg
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Reform Measures in Focus
Social
o
Hukou reform
o
Deepen education, health care, social welfare
o
o
Financial / Economic
o
China-HK mutual recognition of funds, SH-SZ Stock
Connect and further opening of capital markets
o
Deposit insurance scheme introduced
o
Municipal bonds now permitted
o
Liberalise RMB formulation and promote RMB
internationalisation
Relaxation of one-child policy
Reduce pollution and promote clean energy
Political / Admin
o
Anti-corruption
o
Remove administrative approvals and red tape
o
Reduce reliance on land sales
o
Price reforms on water, oil, electricity and gas
system reforms
Corporate / SOE
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o
Encouragement of competition with SOEs by
opening of previously protected sectors
o
Turn SOEs into mixed-ownership enterprises,
promote public-private partnerships
o
Improve governance structure of SOEs with
independent board of directors
Shift in Growth Drivers
Tertiary Industry (Services Sector) Growth Continues to Accelerate

In 3Q15, the share of tertiary industry in overall GDP rose to 49.8%. In contrast, the share of the secondary
industry has fallen from 46.8% in 2007 to 41.1% in 3Q15

Tertiary industry contributed to more employment than secondary industry at 41%, with a 6% YoY growth
Employment breakdown by industry
China nominal GDP growth by industry
Source: NBS; JP Morgan Research; CEIC and Citi Research, December 2015
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Key Milestones for Transition
Shanghai-Hong Kong Stock Connect
Asia Infrastructure Development Bank
Reminbi SDR Status with IMF
Shenzhen-Hong Kong Stock Connect
MSCI China-A Share Inclusion
One Belt, One Road
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Investment Outlook
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Factors for a Turnaround
4 Key Factors:
i.
Valuations: Attractive, stable with opportunities as assets are deeply-valued
ii.
Global Risk Appetite: Improving but sentiments are unstable, risk of
further currency volatility
iii. Chinese Policy Stance: Supportive but experienced some missteps along
the way, generally moving in the right direction
iv. Capital Market Integration: Neutral in the near term but with positive
developments with the launching of the Hong Kong-Shenzhen Connect, QDII
(Qualified Domestic Institutional Investor) Quota Expansion
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Meaningful Exposure
Percentage of Global Market Capitalisation
December 2015*
December 2005*
Other
8.8%
Other
8.7%
Europe
14.5%
United States
44.4%
Europe
22.7%
United States
39.9%
Other Asia
7.6%
Other Asia
5.1%
Greater China
5.0%
Greater China
19.4%
Japan
11.9%
Australia
2.1%
Japan
7.8%
Australia
1.9%
Source: World Federation of Exchanges Members; *based on World Federation of Exchanges Members
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Seeking Yield
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Fed Rate Hike Cycle
Interest rate predictions from the March 2016 meeting
(median values highlighted)
4
3
2
1
0
2016
2017
2018
Source: Federal Reserve
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Longer run
Interest Rate Impact on Bond Prices
High-yield bonds
have more cushion to absorb a
rate increase
Interest Rates
Bond Prices
Low-yield bonds
have less cushion to absorb a
rate increase
Source: Federal Reserve
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Investment Pyramid
Preservation of Capital
Senior Secured Debt
Income
Senior Unsecured Debt
Junior and Hybrid
Debt
Growth and Income
Equity
Capital Growth
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CBA
PERLS VIII
Capital
Notes
Have You Answered These Questions?
• Do you base your investment decisions for
New Zealand equities based on GDP growth?
• Does an unrated bond equate to a bad bond?
• Have you thought about who is calling for
the collapse of the Chinese economy?
• When was the last time you invested for your
clients at a low point in the cycle?
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