The bank’s sentiment on China started to become more positive in April after corporate earnings data improved markedly, Huynh said.
In the months before that, China had seen market corrections that sent several shock waves through global financial markets between mid-2015 and early 2016.
Investors have feared a hard landing of the Chinese economy for years and even though that risk still exists, Huynh said that it had faded somewhat. Its economy has been remarkably resilient even as growth slowed to 6.7% in the third quarter, down from high single digits in previous years.
Investors are also encouraged by the reform agenda, particularly those aimed at restructuring state-owned enterprises, which account for a large part of the economy. Huynh believes the reforms are progressing, helping to stabilise the economy while also diversifying away from an over-reliance on manufacturing and exports over the longer term.
If these trends were to continue, Huynh said the bank could increase its overweight to China even further.
Property market concerns
Despite the positive view on the country, the overweight in the portfolio is not evenly spread across all the sectors of China’s economy. Instead, it is concentrated in companies operating in the consumer, tourism, health care and internet sectors.
“We are of course also looking at the negative side of China – the property market – and what kind of measures the government will implement further ahead,” Huynh said. “How property prices are developing is not just impacting real estate but also consumption.”
In October, the Chinese government announced several measures to cool the property market.
Huynh conceded that even if those were successful, there were still concerns about the shadow banking sector in China and the rising number of non-performing loans.
Much of this new allocation to China was financed by rotating money out of India after the stock market had seen two consecutive years of strong performance.
Many Indian stocks have risen so far that, while not expensive, they are no longer attractive to investors, he said.
“We had been positive on India for quite some time [and] had a substantial overweight, which had proven to be the right strategy,” Huynh said. “We want to see further improvements, especially in earnings, in order to justify further price movements.”
