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Premier Global Utilities Income FundChinese utilities - counter cyclical in the face of slowing GDP?
April 2015
More Information: T: 0845 230 9033 E: [email protected] W: premierfunds.co.ukwww.premierfunds.co.uk 0333 456 9033 [email protected]
At the end of March, the Premier Global Utilities Income Fund held 16% of its portfolio in Chinese utilities. The Fund’s weighting to China has remained in a 15-20% band since it was restructured as a utility fund at the end of June 2012, and China has consistently been the largest single element of its overall emerging market exposure.
For convenience, we divide the Fund’s holdings into 2 broad groups: the (largely) coal fired generators, otherwise known as Independent Power Producers, and the environmental stocks, by which we mean wind power, waste to energy and waste water treatment companies, together with gas as a cleaner substitute for power and heating. At this juncture we should also reiterate that it is invariably asset owning utilities in which the Fund invests, rather than the capital goods manufacturers who supply them. In other words, we will hold wind farm operators, but not turbine manufacturers and so on.
Chart1: Chinese coal price (USD/tonne)
Source: Bloomberg, data from 30.11.2010 to 31.03.2015.
Starting with the Independent Power Producers (IPPs) this group of stocks gives the Fund exposure to the theme of falling coal prices. The Fund currently holds three out of the five Hong Kong listed IPPs, which together comprise just over 8% of the portfolio, roughly half of its total Chinese exposure. With coal accounting for around 60% of the IPPs’ costs, the steady fall in the Chinese coal price shown in the chart above has been very much to their benefit over the past twelve months, and came through clearly in their 2014 results. As a result, all three positions are showing an encouraging return on the original investment, 41% in the case of the Fund’s number one holding, China Power International, at
the end of March. Following a further drop in April, coal prices are now down by almost 15% in 2015. We would expect them to continue to fall as the Chinese economy slows, and these stocks therefore should experience continued improvement in margins, even if actual demand for power, and consequently revenue, reduces in line with slowing industrial production. While we expect that thermal electricity tariffs will be cut at some point this year, recent tariff reviews have not fully reflected reduced coal costs, and we do not believe that the next review will be substantially different. The sector is still being required to implement costly environmental improvements, and returns on capital have only just returned to reasonable levels following many years of high coal prices and sub-normal returns.
Meanwhile, the weight of government policy remains firmly and perhaps more explicitly behind the environmental stocks. With investment accounting for 3.6%, or just under half of China’s 2014 growth rate, we would expect official support for the environment to continue, or even accelerate, in a slowing economic environment. In 2014, China was the world’s biggest investor in renewable energy, and it is second only to the United States in its level of investment in renewables over the past 10 years. Yet both air and water pollution remains a considerable issue in China. It is a cause of embarrassment to the Chinese government abroad, and is starting to become something of a social problem at home as environmental protests gather momentum.
Chart2: Share price performance of Chinese Environmental stocks (rebased, in HKD) compared to the wider Chinese Index
Source: Bloomberg, data from 01.07.2012 to 15.04.2015.
Confirmation that China’s annual GDP growth rate slowed to 7.0% in March, from 7.4% 12 months ago provides a timely opportunity to re-examine the rationale behind the Chinese holdings in the Premier Global Utilities Income Fund. If global investors start to take fright at the prospect of a possible Chinese slowdown, are they right to do so in the case of Chinese utilities, or is this in fact a good time to hold onto, or even increase exposure to a counter cyclical sector?
For professional advisers only, not for distribution to retail clients
Claire Long Manager
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China Everbright Huaneng Renewables
Beijing Jingneng China Power New Energy
Beijing Enterprises Holdings MSCI China
Premier Global Utilities Income FundChinese utilities - counter cyclical in the face of slowing GDP?
April 2015
More Information: T: 0845 230 9033 E: [email protected] W: premierfunds.co.ukwww.premierfunds.co.uk 0333 456 9033 [email protected]
The Premier Global Utilities Income Fund currently holds five Chinese environmental equities which make up almost all of the balance of the Fund’s Chinese weighting. The list includes a pure wind farm operator, Huaneng Renewables, and China’s largest privately owned waste to energy plant operator, China Everbright International. The Fund also holds a number of stocks which offer exposure to several environmental or renewable themes in combination, such as gas-fired power generation, gas transmission and distribution, and waste water treatment. As chart 2 shows, Huaneng Renewables and China Everbright have been the strongest performers since the Fund was restructured in July 2012, and are most representative in that it has held both, in varying weights, since that date, but all five environmentally-focussed Chinese investments currently in the portfolio have performed better than the broader Chinese market, as represented by the MSCI China Index, for the majority of the period.
We do not believe that the two contrasting themes of coal-fired power generation on the one hand, and the environment on the other, should be viewed as mutually exclusive investment areas. Although talk is now starting of “peak coal” (the point at which China begins to wean itself off fossil fuels) coal will continue to make up the majority of its power generation sector well into the next decade. Meanwhile, slower economic growth is likely to maintain downward pressure on coal prices, benefitting coal-fired generators, and at the same time to encourage the Chinese government to unleash a surge of environmental stimulus spending. Indeed, in extremis, some environmentalists have suggested that another round of investment into China’s big energy intensive industries is possible in the longer-term, which could spark another coal boom. However, in our investment strategy for the Premier Global Utilities Income Fund we are focusing more on the medium-term, and believe that utilities provide twin routes to exploit the threat of a Chinese economic slowdown as and when it gathers pace.
1The historic yield reflects distributions declared over the past twelve months as a percentage of the mid-market unit price of the fund, as at 01.04.2015. The yield is not guaranteed and will fluctuate. The price of shares and the income from them may go down as well as up and you may get back less than you invested. Source: Bloomberg, as at 31.03.2015. This article is for information purposes and is only to be issued to financial intermediaries. It is not for circulation to retail clients. It expresses the opinion of the investment manager and does not constitute advice. Reference to any particular stock does not constitute a recommendation to buy or sell a stock. Persons who do not have professional experience in matters relating to investments should always speak with a financial adviser before making an investment decision. For your protection, calls may be monitored and recorded for training and quality assurance purposes.
Issued by Premier Asset Management. Premier Asset Management is the marketing group for Premier Fund Managers Ltd and Premier Portfolio Managers Ltd, who are authorised and regulated by the Financial Conduct Authority of 25 The North Colonnade, Canary Wharf, London E14 5HS. For your protection, calls may be monitored and recorded for training and quality assurance purposes. 230420159599
Premier Global Utilities Income Fund
�� 4.8% p.a. paid quarterly, historic yield1
�� Global equity income fund
�� Focused on global utility companies
�� Blend of developed and emerging markets
�� Long term capital growth potential
�� Aims to deliver lower-than-average volatility (versus the global equity income sector)
�� Risk and return profile expected to have a relatively low correlation with other global equity income funds
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