The truth behind the China equity rally

Stock markets in China have performed strongly despite the weak fundamentals of the economy. Towards the end of March, the authorities loosened stock market restrictions and for the first time allowed mainland Chinese insurance companies and mutual funds to buy H-shares listed in Hong Kong.  The Hong Kong stock market rallied on the back of buy flows from mainland China and, in particular, investors sought dual-listed shares (shares listed on both the Hong Kong and Shanghai stock exchanges) some of which trade at a cheaper valuation in the Hong Kong market. 

Meanwhile, sharp moves in the Shanghai stock exchange also look unsustainable, although we believe speculative flows will remain for a while. Whereas in developed markets institutional investors usually make up roughly 80% of total and retail 20%, in China it is the opposite. The Shanghai stock exchange is very retail driven and newsflow driven and thus by nature volatility would be relatively high. In the shorter term, we see elevated risks in the Chinese system, and a lot of the measures put forth by the government are moving the country away from the path of rebalancing the economy and instead steering the country back towards the investment-driven model that prevailed for the past decade.

Amy Leung – Newton, a BNY Mellon company

Stock markets in China have performed strongly despite the weak fundamentals of the economy. Towards the end of March, the authorities loosened stock market restrictions and for the first time allowed mainland Chinese insurance companies and mutual funds to buy H-shares listed in Hong Kong.  The Hong Kong stock market rallied on the back of buy flows from mainland China … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
The US firms undented by a strong dollar

The impact of a stronger US dollar means mega cap margins are at risk because they tend to earn more of their revenues abroad. We would be cautious about companies that benefited from the weaker dollar during the ‘90s and ‘00s because the inverse will be true in a stronger dollar environment. On saying that, generally when a currency appreciates the stock market valuation in that country goes up. We would expect to see relative earnings of US companies versus the rest of the world weaken but this will be seen mainly at the larger end of the market cap spectrum, whereas smaller caps are due to have a good earnings season. Weaker revenue growth could see downward pressure on earnings from the S&P 500 overall this year but that doesn’t mean it will be true across the board. Financials, technology and healthcare are sectors we are confident of seeing positive earnings growth from in 2015. In this type of environment not everybody wins, but that is when the case for active management is most compelling.

Dave Daglio – The Boston Company Asset Management, A BNY Mellon company

The impact of a stronger US dollar means mega cap margins are at risk because they tend to earn more of their revenues abroad. We would be cautious about companies that benefited from the weaker dollar during the ‘90s and ‘00s because the inverse will be true in a stronger dollar environment. On saying that, generally when a currency appreciates … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Renewables: a sun-kissed proposition

The National Grid has forecast its lowest-ever summer peak electricity demand on its transmission grid of 37.5GW due to the amount of solar PV generation (see above). The system operator said UK capacity in the sector rose to 4.4 gigawatts in February from 2.4 gigawatts in the same month of 2014. Levels are expected to reach 5.5 gigawatts by February 2016.

In the UK we’ve been taking exposure to wind and solar assets already connected to the grid. The opportunities we’ve found are inflation-linked and have cash-flows around 60% derived from government subsidies. Generally, we’re getting an internal rate of return of 7-9% with a dividend yield of 6-7%.

In our view, there’s good legal and political protection from retroactive changes to prices, which means it’s difficult for the government to reduce subsidies for existing assets. One of Newton’s themes – “State Intervention” – is both a benefit and a risk here, but in the UK we feel fairly confident. The government is keen to build out its renewables infrastructure given EU commitments, so to retroactively change subsidies would dis-incentivise future private sector investment.

Paul Flood – Newton, a BNY Mellon company

The National Grid has forecast its lowest-ever summer peak electricity demand on its transmission grid of 37.5GW due to the amount of solar PV generation (see above). The system operator said UK capacity in the sector rose to 4.4 gigawatts in February from 2.4 gigawatts in the same month of 2014. Levels are expected to reach 5.5 gigawatts by February … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Can listed real estate build up to further outperformance?

Real estate investment trusts have outperformed equities and bonds on an annualised basis over five, ten, 15 and 20 years – but we believe there is more to come.

Although valuations for prime assets in global cities such as London have risen, so too have occupancy levels and rental growth. This is partly down to a pause in new construction during the Global Financial Crisis. As the economy recovers the result has been a bottleneck in supply, especially in the commercial and residential segments. For real estate companies this squeeze on supply means they are able to increase rents – a boon both for their bottom line and for their investors.

Meanwhile, the long-term attractions of investing in listed real estate remain unchanged. The asset class can generate predictable income returns but can also provide an element of inflation protection in line with the ability of companies in the sector to charge higher rents.

Finally, most listed real estate investment trusts are obliged by law to pay out almost all of their taxable profits as dividends. In the current low yield environment, we believe this focus on income should remain a particular draw and herald further capital flows into the asset class.

Alan Supple – CenterSquare, A BNY Mellon company*

*CenterSquare is represented in London by BNY Mellon Investment Management EMEA Limited

 

 

Real estate investment trusts have outperformed equities and bonds on an annualised basis over five, ten, 15 and 20 years – but we believe there is more to come. Although valuations for prime assets in global cities such as London have risen, so too have occupancy levels and rental growth. This is partly down to a pause in new construction … read more

  • Download
  • Print
0 comments | Join the conversation, comment now