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China A-shares at 'crisis valuations'

P3CHINA PROSPECTS IN

YEAR OF THE PIG

P4THEMES FOR A

SLOWING WORLD

P6RULES FOR SMALL-

CAP INVESTMENT

T. Rowe Price's Eric Moffett explains why ongoing pessimism towards China has depressed equity valuations in the A-share market (page 2)

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Eric MoffettT. Rowe Price

n the 15 years I have been investing in emerging markets, I have never seen greater

inefficiencies than I see in the China A-share market today.

China’s A-shares are at crisis-level valuations, striking for an economy still growing faster than most places around the world.

Indiscriminate stock selling by local investors on the back of trade tensions with the US have left China’s A-share market trading at less than 10x earnings, compared to 16x a year ago. Such valuations provide compelling investment opportunities for the long term.

Despite trade tensions and a slowing economy, there is a positive case to be made for China’s A-share market, aside from valuations. Household income continues to grow 10% a year and the government continues to hike minimum wages.

Furthermore, due to demographics, there is a shortage of skilled blue-collar workers. The income growth of the average household matters much more to earnings than the GDP of the overall economy.

There are a lot of very good

companies in the deep A-share market, but many remain hidden from the gaze of foreign investors. As a retail-driven market, information is not often published in English, nor are investor roadshows a feature of corporate activity, meaning only a small percentage of the market is owned by foreign investors. This represents a great environment for finding mis-priced opportunities.

Of course, poor quality companies in the A-share market are present, particularly down the market-cap spectrum. However, it is possible to find blue chip companies, growing by around 15% a year, at very reasonable valuations. This level of growth may be less attractive to local investors, but for the astute investor, these are quality companies with sound balance sheets and good dividend profiles.

The most interesting opportunities are in cyclical and trade-related sectors in China that have crashed and for which earnings expectations and valuations are very low – namely autos, property and trade-related companies.

China A-share 'crisis valuations'

euberger Berman has launched a UK-domiciled

fund range, with the group’s first strategy a global long/short equity portfolio run by renowned investor Steve Eisman.

The group's new UK range will deliver solutions in response to the needs and challenges of the UK market, with products often designed in partnership with clients.

Dramatised by Steve Carell in the Hollywood blockbuster 'The Big Short', Steve Eisman's new TM Neuberger Berman Absolute Alpha Fund is a fundamentally-driven global long/short equity strategy, with the management team seeking to generate alpha on both the long and short side of the portfolio.

The Fund does not aim to be consistently market neutral and can take on a positive or negative directional bias through its net exposure. This is expected to be between 65% net long to -20% net short.

Dik van Lomwel, head of EMEA and LatAm at Neuberger Berman, comments: "The launch of the new TM Neuberger Berman Absolute Alpha Fund is clear evidence of our innovative approach and our commitment to the UK. We are extremely pleased to have investors of the calibre of Steve at Neuberger Berman and are thrilled to be able to offer his unique proposition to the UK marketplace."

Steve Eisman spearheads new Neuberger range

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"China’s A-shares are at crisis-level valuations, striking for an economy still growing faster than most places"

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Jeremy LangArdevora

Fabrizio QuirighettiSYZ

Craig FarleyAshburton

here was a significant reframing of how America

views its relationship with China during 2018.

For about two decades, China has been viewed as an opportunity. Now it is viewed as a competitive threat. This is a fundamental shift.

We did not envisage the clash between America’s and China’s view of how to break the low-income trap. America wants

he market sentiment around China has moved swiftly from

extreme pessimism to a more neutral, or optimistic, outlook this year.

Catalysts for the current equity market rally include the growing expectations of a positive outcome to the US-China trade tariff impasse and a softening Fed rhetoric. This should result in a weaker US dollar, relative to Asian and emerging market currencies,

he trade war came at an inopportune moment

for China in 2018, just as the authorities were trying to regain control of the unrestrained growth of credit. However, we believe it is not an insurmountable challenge.

The main risk for China is its inability to halt the deceleration of growth observed over the last 18 months. Beyond the trade war, the ‘natural’ deceleration

China to consume more American goods, China wants to compete with America in IP and high value-added industries.

We think a new cold, economic war has started with China which will create a more fragile general environment for global growth. Stock markets are already worried. But the negative impact of a prolonged trade war has not, in our view, really been felt yet.

which has historically been good news for China investors.

Underpinning the equity rally is a supportive valuation story. At a current price-to-book of 1.48x, Asia ex-Japan is trading at close to a 15-year trough relative to developed markets. Historically, MSCI China, at a current 1.6x price-to-book, has generated a further 15-20% return, with 80% probability of a positive return over the next 12 months.

of Chinese growth – inevitable due to its current size and strong growth over the last 20 years, the transition to a service economy, an ageing population, and slowing productivity growth – represents the real challenge facing China.

We believe this year China should succeed in stabilising growth, at least temporarily, because unlike most developed economies, it still has room for manoeuvre.

"The negative impact of a prolonged trade war has not, in our view, really been felt yet"

"Underpinning the equity market rally is a supportive valuation story"

"The main risk for China is its inability to halt the deceleration of growth over the last 18 months"

Prospects for China in Year of the Pig

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Guy MonsonSarasin & Partners

he shorter maturity segment of the US treasury yield curve is

gradually inverting, indicating we are late in the economic cycle. This means we face a rising risk of recession, although it does not provide a precise timetable.

However, my growth worries are not in the West, where unemployment is low and consumer confidence and corporate profits are still robust. My concerns are in China. Economic visibility is poor, with manufacturing survey data now looking consistently weak.

The Chinese government will react, probably with tax cuts. However, on a recent trip to the IMF by our economist team, it was thought this would offset only some of the trade-related drag. In short, global growth 'ex-China' will be difficult to achieve.

Therefore, a more defensive equity strategy – with an emphasis on sustainable dividend growth, as well as higher-than-

normal cash – remains our broad policy until we know more.

Where are the opportunities? Encouragingly, our analysts are still finding many genuine thematic growth opportunities able to stand out in a slower growth world.

In particular, we see strong investment ideas emerging from our ageing theme. Rich and poor-world health services are slowly converging, assisted by rapid medical innovation. Meanwhile, in the US, there is finally bipartisan support to prioritise medical efficiency.

Climate change is a large investment opportunity – offshore wind, solar, battery and emissions technologies are all part of our portfolios. Also, the steady move to digitisation, supported by AI and Big Data, has been little interrupted by the sell-off in technology stocks – indeed, many new economy investments are now available at, or close to, old economy valuations.

Themes for a slow-growth world

uilding on the success of Nordea Asset

Management's responsible 'Stars' fund range in the equities space, the asset manager has expanded into fixed income.

Nordea has launched two fixed income funds, the new Nordea 1 – European Corporate Stars Bond Fund and the Nordea 1 – Emerging Stars Bond Fund.

Fixed income funds with true ESG implementation represent a relatively new approach to responsible investment. The market is beginning to take notice – with growing recognition ESG issues can present material risk in respect to debt.

"We draw on Nordea’s vast organisational experience in ESG and our proven track record with the Stars equity strategies to apply our Stars concept to fixed income solutions," Marjo Koivisto, co-head of responsible investment at Nordea Asset Management, says. "Emphasising ESG factors can help deliver better risk adjusted returns."

Nordea's commitment to be responsible asset manager is not new: it is deeply rooted in its Nordic DNA.

In the equities space, Nordea has five strategies in its Stars suite – Global Stars Equity, Emerging Stars Equity, Nordic Stars Equity, European Stars Equity and North American Stars Equity.

Nordea's 'Stars' range expands into fixed income

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"We see strong investment ideas emerging from our ageing theme"

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Marc HaynesCohen & Steers

Tony YarrowWise

nvestors can no longer afford to turn a blind eye to the structural flaw of daily-dealing

open-ended property funds.There is an inherent liquidity

mismatch of using daily-dealing vehicles to invest directly in bricks and mortar property, where the underlying assets are illiquid.

Liquidity is rarely an issue when the supply of capital is strong. But in stressed conditions, when there is a rush to exit, the liquidity buffers built into open-ended property funds may quickly become depleted, putting managers in the uncomfortable position of having to sell higher-quality assets at discounted prices.

Investors must also consider the cost of maintaining these liquidity buffers – both in terms

vestors love to talk about the 'death of the High Street', but are reports of its

demise greatly exaggerated? To understand today's situation, it is helpful to look to the past.

In the period 1979-2009, UK real disposable wages roughly doubled from £2,300 a year to £4,700. Since then, it has stayed flat.

While wage growth has been rising since 2014, this has been offset by a spike in inflation. However, with wage growth now accelerating, there finally may be more money available for consumers to spend.

When analysing customer-facing companies, we look for talented and experienced management teams able to understand and deliver on what

of lost performance potential due to the low returns on cash equivalents, as well as the fact investors are paying to hold cash at the bank.

Real estate securities are a better fit for open-ended funds – not just for liquidity reasons, but for the ability to diversify beyond the UK property market.

Given the continued uncertainty about the outcome of Brexit, it is time for UK investors to seriously consider diversifying real estate investments away from a purely domestic-focused strategy to a more pan-European or even global strategy. With UK property exposed to Brexit risks, investors have a strong reason for casting a wider net into other property markets via liquid real estate securities funds.

customers truly need. Avoiding the sale of products easily bought over the internet is important for survival, as is a balance sheet strength able to navigate through several years of challenging conditions.

An example is Shoe Zone, which we have owned for several years. The company exemplifies all the qualities we look for but was unloved by the market. After a solid period of trading over Christmas, the market realised it had thrown the baby out with the bathwater and the shares climbed 30% in two weeks. There are plenty of other examples.

We believe in 2019 the outlook for the 'winners' in the retail space will improve. The fact weaker peers are going under is a further tailwind.

Physical property flaws

The 'death' of UK retail

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Eric Syz unveils succession plan at Banque SYZ

"Real estate securities better fit open-ended funds"

"The outlook for 'winners' in the retail space will improve"

ric Syz, CEO and co-founder of SYZ Group, is

stepping down from his role as CEO of Banque SYZ to oversee strategic vision for the broader group. He will remain CEO of SYZ Group.

Yvan Gaillard, who has been deputy CEO of the SYZ Group, will succeed him as CEO of Banque SYZ. Gaillard will continue to sit on the group's executive committee. In addition, Nicolas Syz will replace Silvan Wyss as head of private banking and joins the bank's executive committee.

Founded in 1996, SYZ Group is structured around three centres of excellence, each one headed by its own CEO.

Each business unit has its own clientele. Banque SYZ serves private banking clients, SYZ Asset Management – which recently appointed William Nott as CEO – serves institutional investors and the SYZ Group's newest addition, SYZ Capital, serves clients seeking privileged access to private investments.

With more than twenty years of expertise, SYZ Group has emerged as one of the biggest success stories of the Swiss financial marketplace.

"I firmly believe these significant changes within the Group and Banque SYZ will enable us to serve our clients even better and ensure the continuity of our independent, family-owned business," Eric Syz explains.

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T: +44 (0) 203 137 7823www.kl-communications.cominfo@kl-communications.com

Ken WottonGresham House

s the small-cap market attracts less attention from research firms

and brokers, some investors are unaware the UK is home to many high-quality smaller companies.

This presents an opportunity for dedicated investors to unearth various fast-growing innovative and disruptive companies. However, patience is required, as well as a commitment to invest in the resources necessary to research such a diverse area.

At Gresham House, every stock considered for investment is thoroughly interrogated utilising proprietary research. A 'conviction score' is awarded to each potential stock based on six key fundamental components.

Management and shareholder structure: We place a significant focus on entrepreneurial and high-quality management teams as a key driver of growth and shareholder value. We also analyse shareholder structure, management ownership and incentives, and alignment of interest with investor objectives.

Long-term corporate strategy: We assess the company’s strategic positioning and how management is looking to enhance strategic value. We measure the clarity, simplicity and deliverability of the business strategy and how it links to long-term value creation.

Realistic opportunity: We seek to understand the size of the company’s realistic addressable market and the trends and sector

dynamics likely to affect this over the life of our investment. We also look for management to be able to clearly define its opportunity, including ways to expand its addressable market through international expansion, new products and/or acquisition.

Market position and business model: We seek to assess the market position of the company, its customer value proposition and its competitive advantages. We also evaluate the key levers of the business model and how the company generates returns.

Operational and financial performance: We focus on operational and financial performance, considering profit and cash flow growth potential. We also consider visibility of revenues and earnings, concentration risks, vulnerability to external shocks outside the control of management, as well

Rules for small-cap investment

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as the key value drivers.Valuation and liquidity:

We use an earnings-based approach to valuation analysis. Each investment is assessed on absolute and relative metrics applicable to the characteristics of the company. Valuations are benchmarked against selected listed peers, long-term sector multiples, appropriate situational comparators, as well as public and private M&A multiples.

By following our six steps, we seek to screen out a substantial proportion of the universe carrying binary investment risk. The combination of focusing on key sectors – business services, consumer, technology, media and telecommunications, as well as healthcare and education – and filtering possible opportunities by underlying profitability, helps mitigate some of the risks of investing in smaller companies.

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"Patience is required, as well as a commitment to invest in resources to research such a diverse area"