Easing on Through 9 March 2016 Investment Themes Macro Policy - - PowerPoint PPT Presentation
Easing on Through 9 March 2016 Investment Themes Macro Policy - - PowerPoint PPT Presentation
POLICY INVESTMENT MODEL Easing on Through 9 March 2016 Investment Themes Macro Policy Outlook Shift from currency stability at all costs to a balance of growth/liquidity support and currency stability Market Outlook The growth/reform mix
Investment Themes
Policy Investment Thesis Mix of long-term reform beneficiaries and short-term growth supports
- Supply side reforms to disappoint (Steel, Coal)
- Urbanisation (Property, Telco Operators, Insurance)
- Financial reform (Insurance)
- Consumer, market pricing (Healthcare, Telcos)
2
Macro Policy Outlook Shift from currency stability at all costs to a balance of growth/liquidity support and currency stability Market Outlook The growth/reform mix looks positive for March, but worries and volatility will persist.
For full report, please follow link.
Growth policy: Reading the RRR cut
3
- China’s RRR cut, although expected in March, came earlier than we thought
(March 1) Its impact on key economic issues:
- Growth – explicit sign that policymakers switching to pro-growth stance
- Reform – As the Two Conferences begin this week, the RRR cut means the
conversation can shift from supporting growth to structural reform
- RMB – Outlook for gradual depreciation, not one-off devaluation as seen to risk
SDR inclusion
- Capital Outflows – Expected to slow after another $600bn leaves China. Will
markets panic when reserves hit $2.6trn?
- FX Reserves – With just $600bn of illiquid reserves & $2.6trn liquid, China can bear
further outflows.
- HK equities: Perception of reserves inadequacy could weigh on HK equities.
For full report, please follow link.
Monetary policy: China shifts to easing bias
- The PBOC has damped mounting speculative forces since
mid-Jan, providing room for an RRR cut
- PMI fell to the lowest since Nov 2011, which happened to be
the start of an easing cycle
- In late Feb, PBOC switched to a clear pro-growth bias and risk
management (with bond maturities in March)
4
PBOC Liquidity Injections vs Capital Outflows
- 2000
- 1500
- 1000
- 500
500 1000 1500 2000 2500 RMB bn Total Capital Flow OMO RRR Unconventional liquidity 44 46 48 50 52 54 56 58 60 Index PMI Production New Orders Export Orders
China’s Manufacturing PMI and Major Subindices
For full report, please follow link.
Monetary injections needed to offset capital outflows
- Repayment of offshore loans and trade credit accounted for 48% of capital outflows in
2015
- With $300bn outstanding short-term external debt, assuming same mix, this implies
$600bn (3.9trn yuan) of further capital outflows.
- 5-6 50bp RRR cuts (690bn yuan each) would fully neutralise this outflow
- Though may not be needed if bank deposit growth remains strong on fund inflows from
WMPs etc
5
Net Liquidity Injections vs Capital Flows Outstanding FX debt: BIS, BOP
- 100
200 300 400 500 600 700 800 US$bn Short-term debt, BIS BOP: Major Other Assets
- 8,000
- 6,000
- 4,000
- 2,000
- 2,000
4,000 6,000 8,000 10,000 01/2011 04/2011 07/2011 10/2011 01/2012 04/2012 07/2012 10/2012 01/2013 04/2013 07/2013 10/2013 01/2014 04/2014 07/2014 10/2014 01/2015 04/2015 07/2015 10/2015 01/2016 RMBbn 12m - Cap Flow 12m - PBOC 12m - Net New Deposits
For full report, please follow link.
FX: China can survive outflows
- We believe China has only $600bn of illiquid reserves, ie room to run down reserves for
a longer period of time than the market believes, even if capital outflows intensify.
- China has ample liquid FX reserves: est $2.6trn (of $3.2trn total) vs $500bn decline in
2015 and peak $100bn/mth run-rate
- IMF ARA; the claimed $2.6trn danger level comes from misapplication of the formula; it
comes down to $1.6trn with capital controls – in any case this is a guideline not a hard- and-fast floor
6
RMB Exchange Rate: US$ vs Trade Weighted
5.8 5.9 6 6.1 6.2 6.3 6.4 6.5 6.6 100 105 110 115 120 125 130 135 Index CNY - Trade Weighted (BIS) USD/CNY
RMB appreciation
$US(bn) China %
- f
tot Belgium %
- f
tot Total %
- f
tot Total 1,817 100% 713 100% 2,530 100% Of which Equity 320 18% 34 5% 354 14% Of which long-term debt 1,489 82% 666 93% 2,154 85% …of which Treasury 1261 85% 353 53% 1,613 75% Of which Short-term debt 8.7 0% 13 2% 22 1% …of which Treasury 8.0 92% 10 80% 18 85%
- Estimated Breakdown of FX reserves based on US Treasury
data
Source: US Treasury, NSBO China
For full report, please follow link.
PIM Performance vs HSCEI and MSCI China
7
Absolute return, % PIM HSCEI MSCI CSI300 Month
- +1.2
- 3.9
- 1.4
- 2.3
Quarter
- 10.3
- 10.1
- 14.7
- 19.3
Annual
- 11.9
- 35.0
- 26.4
- 19.5
Performance Statistics for February 2016
Where did the relative performance in the February PIM come from ?
- Water-H (+2.9%) and Property-H (+0.5%) both saw gains in February in a weak market as the
sectors were seen as beneficiaries of easing to support growth.
- Steel-H (-4.9%) and Coal-H (-4.2%) were both short positions and underperformed the index
as the market came round to our view that overcapacity cuts would fail to have a significant impact. For full report, please follow link.
Policy Investment Strategy
Policy investment themes for March drive sector choices: Changes
- Success (relative underperformance) of Steel and Coal SELL calls leads us to shift them to NEGATIVE
Buys:
- Telco Operators - H: China Mobile (941 HK), Unicom (762 HK), Telecom (728 HK)
- Water – H/A: Tianjin Capital (1065 HK), China Everbright Intl (257 HK), Beijing Enterprises Water (371 HK),
China Water Affairs (855 HK), Beijing Originwater Techno (300070 CH), Shanghai SMI (600649 CH), Chongqing Water (601158 CH), TUS-Sound Evnt (000826 CH), China Gezhouba (600068 CH), Tianjin Capital (600874 CH)
- Healthcare – A: Shanghai Fosun (600196 CH), Shanghai Pharma (601607 CH) , Sinopharm (600511 CH),
Kangmei (600518 CH), Beijing Tongrentang (60085 CH), Guangzhou Baiyunshan (600332 CH)
- Property – H: COLI (688 HK) Vanke (2202 HK) , CRL (1109 HK) , Shimao (813 HK)
8
For full report, please follow link.
Water H/A – time to add holdings of this BUY
Water sector touches on two major policy drives: urbanisation and clean energy/environmental. Water investment +21% in 2015 to 725bn yuan &
- 46% above target of 1.8trn yuan in 2011-15
Further consolidation expected of 340 water
- perators;
- 120 envt prot M&A deals (40bn yuan) in 2015 vss
- 88 deals (22.5bn yuan) in 2014
Robust investment to be sustained:
- 20% hike in waste water treatment fee for non-
residential users expected in 2016
- Expand on agricultural water reform pilots in 80
counties across 27 provinces.
- Implement irrigation water tariff reform over
2016-2020 focusing on capping water demand, introducing consumption quotas, and setting up a water rights trading system.
9
- 60%
- 50%
- 40%
- 30%
- 20%
- 10%
0% 10% 20% 30% 40% 50% 10 20 30 40 50 60 70 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15
- utperformance vs industry target
Index H Sector Performance (LHS) Industry Performance (RHS)
- 60%
- 50%
- 40%
- 30%
- 20%
- 10%
0% 10% 20% 30% 40% 50% 10 20 30 40 50 60 70 80 90 100 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15
- utperformance vs industry target
Index A Sector Performance (LHS) Industry Performance (RHS)
Water-H Index and Industry Outperformance Water-A Index and Industry Outperformance
For full report, please follow link.
Telco Operators – a BUY
Switch to 4G subscribers bringing higher ARPU: China Mobile added 220m new 4G users in 2015 vs 90m in
- 2014. China Unicom and China Telecom have a
combined 113m 4G subscribers by January. Tower sharing helps to reduce capex: 75% of newly built towers by the China Tower Holding Company are shared, saving 50bn yuan of capex last year. China started pilot programme of telco universal service fund-the subsidy will account for 15%, 20%, 30% and 35% of the construction cost for eastern, central, western and autonomous regions, respectively. Official target to complete broadband coverage in both rural and urban areas by 2020.
10
Telco Operator-H Index and Industry Outperformance
Telco operators – H are a BUY owing to a positive policy environment and relative underperformance
- 15%
- 10%
- 5%
0% 5% 10% 85 95 105 115 125 135 145 155 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15
- utperformance vs industry target
Index H Sector Performance (LHS) Industry Performance (RHS)
For full report, please follow link.
Healthcare-A – a BUY
- It will be a key sector to see substantial consolidation and restructuring as the
government seeks to boost R&D and economies of scale.
- Growth from government spending, individual healthcare insurance and the private
sector after being heavily promoted during the 13th Five Year Plan.
- State Council pledged to boost R&D especially for traditional medicine, as well as
expanding its use in hospitals.
- 2016 healthcare reform will focus on the introduction of market-oriented pricing
mechanisms for healthcare services for city-level public hospitals.
- Health insurance premium growth of 70.8% yoy has far outpaced the industry average of
59.2% yoy.
11
Healthcare / Pharma – A is a BUY owing to a positive policy environment and relative underperformance
For full report, please follow link.
Property H – a BUY
Feb 2: a further cut in down-payment requirements for all cities except Tier 1s and Sanya.
- First-home down payment floor cut to 20% from 25%
- Second-home down payment cut to 30% from 40%
Developers in some lower-tier cities reporting buyers back in showrooms, price expectations flattened out and building activity seen to pick up Many other tools in the tool box to boost home sales: home accumulation funds, tax cuts, affordable housing policy etc Expect Tier 1 policy tightening to rein in price pressure Key investment beneficiaries are large developers with land banks in large cities (our 30-city basket).
12
Home sales vs mortgages
Property – H is a BUY owing to a positive policy environment and relative underperformance
- 20
- 10
10 20 30 40 50 60
- 40
- 20
20 40 60 80 100 120 140 160 180 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 % change yoy % change yoy Property sales GFA vs mortages Mortgages Property Sales GFA
20 25 30 35 40 45 50 55 60 65 70 75 80 Jan Feb March April May June July Aug Sep Oct Nov Dec 2016 Jan Weeks
Number of weeks required to absorp unsold housing inventory at six-month moving average sales speed
Total Tier 1 Tier 2 Tier 3
For full report, please follow link.
About NSBO
13
Bob Benton, Group Chairman For 8 years Bob was the Chairman of Clarksons Plc. Previously he was as Managing Director and Head of Media at Canaccord Adams. Before that, he was Chairman of Bridgewell Group, the stockbroker which he founded in 2002 and floated on AIM in 2007. Bob has also held office as Chairman and CEO of Charterhouse Securities, global head of sales at ABN Amro and Managing Director of HSBC Securities Services (formerly HSBC James Capel) before becoming chief executive. Derek Han, China Chairman Derek is a former Chairman of PG Partner Bank in Zurich and has been a foreign exchange advisor at Frema Invest, a board member of Ineo, and of Banque SCS Alliance. Derek is also a world-renowned concert pianist, he graduated from the Juilliard School, one of the most prestigious performing arts college of the world, at age 18. Richard Abrahams, CEO Before founding North Square Capital in 2008, Richard was CEO and Head of Trading at Pali International, where over his tenure the firm established itself as a leader in event-driven equity research and
- execution. Prior Pali, Richard was head of equity of HSBC in the US.
Duncan Wrigley, Head of China Research
Before joining NSBO in 2013, Duncan worked for seven years at Shui On Land in Shanghai, where he managed economic and real estate analysis and provided inputs into management’s strategic and investment decision-making. Before that, he worked at the Economist Group in Hong Kong and London, Business Monitor International in London and the Center for Strategic and International Studies in Washington DC. He has a Master
- f
Arts in International Relations and International Economics from Johns Hopkins University School of Advanced International Studies and a Bachelor
- f
Arts in Philosophy, Politics and Economics from Oxford University.
Executive Team
- Group Chairman, Bob Benton - Over 20 years experience as a financial adviser, a fundraiser, and an investor.
- China Chairman, Derek Han – Chinese knowledge, contacts and FX expertise.
- Chief Executive, Richard Abrahams – wide network of contacts in London, New York and Hong Kong and over 25 years sales experience
Beijing Office
- Based in Beijing, not Hong Kong or Shanghai, giving better access to government thinking and experienced advisors
- Chinese staff and research, not a Western institution or interpretation
- Growing pool of academic/think-tank advisors to give policy insight & direction
- Relationship with GAPP and Xinhua gives status and security onshore
London Office
- Provides sales and regular client contact, feeding investment ideas and recommendations to clients in London, Europe, Hong Kong and
New York
Exclusive Global Distribution by North Square Blue Oak Limited This presentation has been prepared by North Square Blue Oak Ltd. For the purpose of the UK Financial Services & Markets Act 2000 this publication has been approved by North Square Blue Oak Limited, which is authorised and regulated by the UK Financial Services Authority firm (reference number: 524 544). This presentation is for distribution only under such circumstances as may be permitted by applicable law. It has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. It is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, except with respect to information concerning North Square Blue Oak Limited (“NSBO”), its subsidiaries and affiliates, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the presentation. The presentation should not be regarded by recipients as a substitute for the exercise of their own judgment. Any opinions expressed in this presentation are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of NSBO as a result of using different assumptions and criteria. NSBO is under no
- bligation to update or keep current the information contained herein. NSBO, its directors, officers, employees and consultants or clients may have or have had interests or long or short positions
in the securities or other financial instruments referred to herein, and may at any time make purchases and/or sales in them as principal or agent. NSBO may rely on information barriers, such as “Chinese Walls”, to control the flow of information contained in one or more areas within NSBO, into other areas, units, groups or affiliates of NSBO. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Options, derivative products and futures are not suitable for all investors, and trading in these instruments is considered risky. Past performance is not necessarily indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this presentation. For investment advice, trade execution or other enquiries, clients should contact their local sales representative. Neither NSBO nor any of its affiliates, nor any of NSBO’s or any of its affiliates, directors, employees, consultants or agents accepts any liability for any loss or damage arising out of the use of all
- r any part of this presentation. Additional information will be made available upon request.
Except as otherwise specified herein, this material is communicated to persons who are Professional Clients or Eligible Counterparties as that term is defined under the Markets in Financial Instruments Directive (2004/39/EC). It is not to be distributed to or relied upon by Retail Clients under any circumstances. The information contained herein does not apply to, and should not be relied upon by, private customers. This presentation may not be reproduced or redistributed, in whole or in part, without the written permission of NSBO and NSBO accepts no liability whatsoever for the actions of third parties in this respect.
Beijing, China B616, Nanxincang Business Tower, A22 Dongsishitiao, Beijing, 100007 People’s Republic of China Tel: +86 10 5218 5160 www.nsbo.com 中国,北京 中国,北京东四十条甲22号 南新仓商务大厦B616室, 邮编100007 London, United Kingdom 2nd Floor, 12 Groveland Court, London, EC4M 9EH United Kingdom Tel: +44 (0)20 7024 4600, Fax: +44 (0)20 7024 4699
14