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06-06-2015, 08:59 PM
Investors: the China tidal wave is about to hit
Patrick Commins
868 words
21 May 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
GaveKal's Louis-Vincent Gave wants Australian investors to know they are missing out.
"You are all part of one of the most crowded trades there is - nobody owns China."
Mr Gave is the chief executive and co-founder of one of the most widely respected China research firms, GaveKal Dragonomics. The Hong Kong-based firm also manages money, and it's in his capacity as an investor that he enthusiastically describes himself as a "massive China bull".
His argument is that the global investment community is under-exposed to Chinese stocks and bonds, but will be compelled to increase its exposure over the coming two or three years as Chinese financial assets begin to be included more fully in the global benchmarks that passive - and many active - institutional investors track.
The usual responses from outside observers to the more than doubling in the Shanghai Stock Exchange Composite Index in a year is regret at having missed it, followed by a degree of comfort, inasmuch as such a rapid move is likely to snap back just as quickly.
Gave would certainly agree that most international investors have failed to participate. "Foreigners have completely missed this bull market," he says, pointing to the iShares China Large-Cap ETF - the biggest of its type in the United States.
"The fund has actually had a shrinking number of outstanding shares year to date. So, as China has rallied, American ETF investors have actually been taking profits."
But Gave believes Chinese shares can continue to rise. "So far, it has been a liquidity-driven bull market. Money has come out of Chinese retail investors and into shares," he says. "But the tidal wave that is about to hit - and it is a tidal wave - is foreign investor money."
Gave's advice for investors is blunt: "Either you get in front of it or you are going to be left chasing your tail. I believe we are at the beginning of a massive bull market."
Gave, who spoke exclusively to The Australian Financial Review before his keynote address at the Morningstar Investment Conference in Sydney on Thursday, says investors can participate by getting exposure to Hong Kong-listed "H" shares, which have dual listing with Shanghai and will follow any jump in mainland listed stocks.
"They might not go up in the next three months, but over the next three years it's still a great trade," he says.
They can also invest in the Ironbark GaveKal Asian Opportunities Fund.
Gave argues that Chinese capital markets are going through a historic shift that will lead to its equity and bond markets being included more meaningfully in global indices, after years of under-representation.
The statistics are striking: China has the second-largest economy in the world and the second-biggest sharemarket. It accounts for 14 per cent of global gross domestic product and 12 per cent of total global equity market capitalisation. And yet it represents between 0 and 2 per cent of global stock indices, and is absent from world bond indices. The reasons are obvious. Thanks to capital controls and the limited convertibility of the currency, it has been hard for foreigners to buy Chinese mainland stocks, and even harder to buy bonds, making it difficult for global index firms such as MSCI to include Chinese assets in the world benchmarks that trillions of dollars in passively managed funds follow.
But the introduction of the Hong Kong-Shanghai Stock Connect program has handed foreigners access to listed Chinese companies. Meanwhile, Chinese policymakers are moving aggressively towards full convertibility of the renminbi. In November, the International Monetary Fund will meet to decide whether to add China's currency to the select group reserve currencies, which includes the US dollar, the euro, British sterling and the yen.
"I think that come November, the IMF will vote 'yes'," Gave says. "They will say yes fundamentally out of the spirit of survival and the fact they want to stay relevant."
Gave points to the experience of the Asian Development Bank, which for years denied China a greater seat at the table, only to find itself rendered almost irrelevant by the China-funded Asian Infrastructure Investment Bank.
"If [the IMF] votes yes, then all of a sudden if you are managing the reserves of South Korea, or South Africa, or Australia there are now five official reserve currencies.
"Four of them have short-term interest rates at zero and long-term interest rates between 50 to 200 basis points, and then here's another one we just added to the mix, with short rates of 275 basis points and long rates of 425 - what would you do?"
The answer is that central banks will put more of their reserves into the renminbi. Which is also why Gave is bullish on the $US4.5 trillion ($5.68 trillion) Chinese bond market, of which, he says, only about $US100 billion is foreign owned.
"The potential is for interest rates in China to collapse 100 to 150 basis points", he says, which would translate into a hefty capital return for the holders of the assets.
Fairfax Media Management Pty Limited
Document AFNR000020150520eb5l00020
Patrick Commins
868 words
21 May 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
GaveKal's Louis-Vincent Gave wants Australian investors to know they are missing out.
"You are all part of one of the most crowded trades there is - nobody owns China."
Mr Gave is the chief executive and co-founder of one of the most widely respected China research firms, GaveKal Dragonomics. The Hong Kong-based firm also manages money, and it's in his capacity as an investor that he enthusiastically describes himself as a "massive China bull".
His argument is that the global investment community is under-exposed to Chinese stocks and bonds, but will be compelled to increase its exposure over the coming two or three years as Chinese financial assets begin to be included more fully in the global benchmarks that passive - and many active - institutional investors track.
The usual responses from outside observers to the more than doubling in the Shanghai Stock Exchange Composite Index in a year is regret at having missed it, followed by a degree of comfort, inasmuch as such a rapid move is likely to snap back just as quickly.
Gave would certainly agree that most international investors have failed to participate. "Foreigners have completely missed this bull market," he says, pointing to the iShares China Large-Cap ETF - the biggest of its type in the United States.
"The fund has actually had a shrinking number of outstanding shares year to date. So, as China has rallied, American ETF investors have actually been taking profits."
But Gave believes Chinese shares can continue to rise. "So far, it has been a liquidity-driven bull market. Money has come out of Chinese retail investors and into shares," he says. "But the tidal wave that is about to hit - and it is a tidal wave - is foreign investor money."
Gave's advice for investors is blunt: "Either you get in front of it or you are going to be left chasing your tail. I believe we are at the beginning of a massive bull market."
Gave, who spoke exclusively to The Australian Financial Review before his keynote address at the Morningstar Investment Conference in Sydney on Thursday, says investors can participate by getting exposure to Hong Kong-listed "H" shares, which have dual listing with Shanghai and will follow any jump in mainland listed stocks.
"They might not go up in the next three months, but over the next three years it's still a great trade," he says.
They can also invest in the Ironbark GaveKal Asian Opportunities Fund.
Gave argues that Chinese capital markets are going through a historic shift that will lead to its equity and bond markets being included more meaningfully in global indices, after years of under-representation.
The statistics are striking: China has the second-largest economy in the world and the second-biggest sharemarket. It accounts for 14 per cent of global gross domestic product and 12 per cent of total global equity market capitalisation. And yet it represents between 0 and 2 per cent of global stock indices, and is absent from world bond indices. The reasons are obvious. Thanks to capital controls and the limited convertibility of the currency, it has been hard for foreigners to buy Chinese mainland stocks, and even harder to buy bonds, making it difficult for global index firms such as MSCI to include Chinese assets in the world benchmarks that trillions of dollars in passively managed funds follow.
But the introduction of the Hong Kong-Shanghai Stock Connect program has handed foreigners access to listed Chinese companies. Meanwhile, Chinese policymakers are moving aggressively towards full convertibility of the renminbi. In November, the International Monetary Fund will meet to decide whether to add China's currency to the select group reserve currencies, which includes the US dollar, the euro, British sterling and the yen.
"I think that come November, the IMF will vote 'yes'," Gave says. "They will say yes fundamentally out of the spirit of survival and the fact they want to stay relevant."
Gave points to the experience of the Asian Development Bank, which for years denied China a greater seat at the table, only to find itself rendered almost irrelevant by the China-funded Asian Infrastructure Investment Bank.
"If [the IMF] votes yes, then all of a sudden if you are managing the reserves of South Korea, or South Africa, or Australia there are now five official reserve currencies.
"Four of them have short-term interest rates at zero and long-term interest rates between 50 to 200 basis points, and then here's another one we just added to the mix, with short rates of 275 basis points and long rates of 425 - what would you do?"
The answer is that central banks will put more of their reserves into the renminbi. Which is also why Gave is bullish on the $US4.5 trillion ($5.68 trillion) Chinese bond market, of which, he says, only about $US100 billion is foreign owned.
"The potential is for interest rates in China to collapse 100 to 150 basis points", he says, which would translate into a hefty capital return for the holders of the assets.
Fairfax Media Management Pty Limited
Document AFNR000020150520eb5l00020