There are many investment opportunities in the China market
As the next few months will be quite delicate for equity markets globally, de Planta explains the importance of acting tactically in this phase of the cycle and why he believes Chinese equities will outperform fixed income in the long term. The interview also covers his views on sustainability and the importance of integrating ESG factors into the investment process.
In recent years with the opening up of China’s capital markets, foreign asset managers have accelerated their business development in China. One of Europe’s oldest wealth and asset managers, Pictet Group, is one of them. In November 2020, Pictet Asset Management set up its WFOE in Shanghai, Pictet Private Fund Management (Shanghai) Limited. In August this year, its WFOE successfully registered as a Qualified Domestic Limited Partner (QDLP) Manager with the Asset Management Association of China (AMAC), and launched its first QDLP fund in September.
Long term view of Chinese market
Pictet was established in Geneva, Switzerland in 1805. In its first 160 years, it focused on serving private clients. In the past 40 years,it has increasingly developed its institutional client business, including pension funds,sovereign funds,life insurance companies and increasingly banks. As one of the longest standing investment managers in Europe, it currently manages USD 740 billion in assets, the third largest in Switzerland.
De Planta said, “We have been investing in China for over 20 years, initially through QFII, then RQFII, HK Shanghai Stock Connect, Bond Connect etc. We have been a pioneer in emerging markets equity funds globally, we subsequently launched Asian equity funds and China only equity funds. We were one of the first international asset managers to launch a UCITS fund to invest in onshore Chinese bonds.”
Today the fund is about USD1.7 billion dollar in size. De Planta added that Pictet also runs Chinese equities in its broader Asian equity portfolios and global emerging market equity portfolios, which add up to over USD 4 billion in assets.
Recently, several large foreign asset managers have applied and received the licence for public fund management in China, and are preparing to take off in the China market in a big way. De Planta said that in the longer term Pictet’s aspiration is to be a major player in the Chinese savings market. In the next few years,Pictet is focused on ensuring its brand is recognized by institutional investors, bank distributors and individual investors as a trusted great brand,offering innovative investment solutions and strong performance and high integrity?
In de Planta’s view, Chinese equities are quite attractively priced right now compared to other Asian or international equities. In Fixed Income, the relatively high yield in investment grade Chinese bonds can also be attractive to investors.
Chinese equities – three major themes
Commenting on global markets, de Planta believes investors have to take into account what is happening globally because increasingly capital flows are interconnected. He thinks that we are approaching a phase of the markets where equities have outperformed a lot since March 2020 and if there is a correction in the US market, that will have impact on other markets.
He said, “I think the next few months will be quite delicate for equity markets globally. When global equity funds face redemption, they often sell indiscriminately across the board. So with that in mind, we favour Chinese fixed income for the next few months. The recent regulatory developments in China and its property sector have provoked a bit of anxiety among investors, this has led to widening of credit spreads in the Chinese market,particularly in the High Yield segment, and that maybe actually an attractive entry point for investors.”
De Planta believes that in the longer term over the next few years, Chinese equities will outperform bonds. “What is important more than ever in this phase of the cycle is to be tactical, to remain agile and to be able to switch from equities into fixed income and vice versa. That is the skill of tactical asset allocation,something which we are quite good at based on our international and long experience over many cycles across two centuries,and we have developed the multi- asset expertise.”
In terms of the Chinese equities market, de Planta said that Pictet has identified several long term trends which are very relevant to China. The first is environmental,companies which provide solutions that respond to climate change and energy transition are bound to benefit over the coming years, including companies in the water sector such as in water purification,clean water distribution and water filtration, management of forestry etc. Companies active in clean energy, such as electric vehicles, are promising sectors.
“The second area is technology, such as digital interaction, robotics, or IT security which is a big issue globally. The third area is healthcare, with aging societies and the major scientific advances in biotechnology, pharma and medical technology, these are also promising sectors.”
Sustainability is in its DNA
Sustainable investing and ESG have deep origins in Europe. As one of the longest standing European financial institutions, Pictet has always put responsibility as one of its core guiding principles. “We strongly believe integrating ESG factors into the investment process will help us make better long-term investments for our clients,” de Planta added.
De Planta said that as a company, Pictet has to behave sustainably. ”For instance, we have eliminated our balance sheet exposure to fossil fuel producers and extractors. We also try to reduce our own carbon footprint and have emission per employee reduction targets. We also do a lot of philanthropy and are involved in the advocacy of environmental issues.”
In terms of including sustainability in how Pictet manages assets, de Planta said that it's multi-layered, first is the integration of ESG aspect into research and portfolio construction. Pictet engages service providers and external experts to do research,for instance,on pollution,environmental, safety standards and so on. “We use research in how we rate the companies, whether it should be in our portfolios and their allocations.”
Second, de Planta said that Pictet offers investment products which are part of the solution, focused on for instance energy transition,clean water and so on. “While we don't issue such products domestically in China yet, but we have distributed many of these thematic mutual funds internationally with a lot of success, and this actually channels capital to supporting sustainable development.”
Third, as an active manager, Pictet engages with companies and meets the management and challenges them, to put pressure on them gently but firmly to change their practices. “For instance, recently we met with a European consumer good company on plastic packaging. We challenged them that they are using too much plastic packaging and encouraged them to use alternative plastic,bio plastic or no plastic at all,” recalled de Planta.
Fourth, de Planta said that when relevant, Pictet reports to its clients how much exposure their portfolios have to the United Nations’ sustainable development goals. Fifth, Pictet is also active in thought leadership, publishing research papers by teaming up with academic institutions?
“In future, we hope to be able to build alliance with hundreds of pension plans, asset managers and sovereign wealth funds to lobby index providers to exclude certain companies which are particular harmful to society. Once a company is in an index, you have thousands of managers who actually end up buying that company. So if you can get it out of the index, the cost of capital for the company increases. This is a very effective way of using capital markets to achieve sustainable development goals. Looking ahead, when it comes to China,we hope to produce more ESG related research as well.”