Four in five global investors plan to increase allocations to China in next 12 months, according to EIU and Invesco study
Over 80 per cent of global investors plan to increase either significantly or moderately their organisation’s allocation to Chinese investments over the next 12 months, according to an Economist Intelligence Unit survey on global investors’ China exposure, commissioned by Invesco. Only 4 per cent plan to reduce exposure to China.
The China Position, a survey of 411 asset owners and professional investors across North America, Asia Pacific (APAC) and Europe, Middle East & Africa (“EMEA”), collected responses from executives at global organisations on exposure to Chinese investments. Respondents included asset and wealth managers, assets owners including insurance companies and sovereign wealth funds as well as commercial banks. Assets under management at surveyed organisations spanned from USD500 million to greater than USD10 billion. Respondents generally described their organisation’s China exposure as above average when compared to industry peers.
Marty Flanagan, President and CEO of Invesco, says: “The findings are promising and support our view that China’s massive growth and continuing efforts to allow greater access to its markets represent a significant and increasingly attractive opportunity for both domestic and global investors. Having helped investors navigate markets in China for more than 30 years, we share the view that a thoughtful allocation of Chinese asset classes can play a meaningful role in helping investors achieve their long-term investment objectives.”
According to the survey results, nearly 90 per cent of respondents have “dedicated investment exposure” to China, where “dedicated” referred to those investments that are deliberately China-specific and not part of a broader regional or other grouping such as emerging markets. This could include specific allocation to equities, fixed income or alternative assets through managed funds, ETFs or other investment vehicles. For the remaining 10 per cent without this dedicated allocation, about two-thirds still pursue China exposure through a global-, Asia- or emerging-market basket.
While “improvements to my organisation’s China expertise” is the top driver among survey respondents for having dedicated investment exposure to China (41 per cent), advancements such as improved corporate reporting, legal protections, regulatory oversight and financial intermediaries are also significant factors for survey respondents to consider increased investment in the country.
For those organisations without a dedicated allocation, the top challenge cited for investing in China was “lack of transparency in the financial system for foreign investors” at 39.5 per cent. Three additional challenges were cited by over 30 per cent of respondents: concerns about legal protections, concerns about economic stability, and lack of trusted financial intermediaries. When asked what catalysts might make their organisation consider dedicated exposure, over 50 per cent of respondents cited increased legal protections for foreign investors.
Andrew Lo, Senior Managing Director and Head of Asia Pacific at Invesco, says: “The results of this comprehensive survey support much of the broader sentiment we are seeing from our global clients. Many have begun to recognise China as a key investment destination and a pillar of global portfolio allocation. Chinese authorities have shown their commitment to support investor interest in the country’s capital markets, and we have already seen constructive steps such as the lifting of investment quotas in the QFII program earlier this year.”
Survey respondents with a dedicated China exposure cited multiple objectives for maintaining this allocation. The top response was portfolio diversification at 87 per cent, followed by “gaining experience for internal teams” at 69 per cent; seeking alpha was third at 62 per cent. When asked whether these objectives had been met, 77 per cent agreed that they had, while 21 per cent said it was too early to tell and 1 per cent said that objectives had not been met.
Survey respondents remain positive about the outlook for the global economy, and even more positive on China. About two-thirds of respondents believe global economic conditions over the next 12 months will be better than current conditions, while nearly three-quarter believe economic conditions in China will be better.
North American respondents are broadly bullish in their economic outlook across markets, with over 80 per cent of respondents expecting better economic conditions both globally and in China over the next 12 months. Investors in EMEA and APAC, meanwhile, are considerably more optimistic on China versus the global economy; 65 per cent of EMEA respondents believe that global economic conditions will be better versus 73.5 per cent who said China economic conditions would be better. In APAC, sentiment is slightly softer on both outlooks, with 53 per cent seeing improvement globally and 66 per cent in China.
In line with China’s rising position as a global leader in technological development, technology innovation (such as artificial intelligence, robotics, etc.) is the top investment theme most likely to attract investment from the organisations surveyed at 58 per cent of respondents, followed closely by financial services at 51 per cent and “New Economy” services such as healthcare, IT and education in third at 41 per cent. The renewable energy segment represented another significant theme that was likely to attract investment, particularly in North America at 39 per cent of respondents, tied with “New Economy” services for likely investment.
Jason Wincuinas, Senior Editor at Economist Intelligence Unit, says: “The bullish stance uncovered in this survey was illuminating. Despite the ups and downs of global stock exchanges, the 12-month outlook from some of the world’s largest investors was distinctly positive. We also learned that these organizations are leveraging China’s burgeoning financial-market reforms, with the overwhelming majority claiming to have some form of onshore business operations. And we conducted this survey before some of the most recent announcements about easing restrictions on foreign investors, which indicates China was already much more integrated into the global economy than might have been expected.”
When asked what impact the US-China trade war will have on investment decisions, results were mixed. While 43 per cent of respondents say it will have a negative impact on their investment decisions, 42 per cent say it will have a positive impact. North American respondents are the most optimistic, with 53 per cent of respondents seeing “some” or “significant’ positive impact; APAC investors are the most negative, with nearly 50 per cent expecting a “moderate negative impact” and an additional 8 per cent a “significant negative impact”.
Despite the variation in expected impact, organisations still expect to either “increase significantly” or “increase moderately” their China exposure when asked what result their organisation’s trade war forecast will have on China investment levels. In both APAC and EMEA, over 67 per cent of respondents expect to increase China exposure, and in North America 71 per cent expect to increase in the next 12 months.
The survey pegged equities as the most popular asset class for institutional investors, with over two-thirds having a direct allocation to China onshore equity market A shares (and as high as 82 per cent in North America), and over half have a direct allocation to China offshore equity market H shares (with APAC reaching 80 per cent).
Over the next 12 months, 52 per cent of respondents said they expect to increase allocation to onshore China equities, the highest figure among all Chinese asset classes. An additional 34 per cent expect allocations to stay the same, and 12 per cent plan to decrease. Respondents broadly planned to increase rather than “stay the same” or decrease allocations across most asset classes, particularly private markets including real estate and direct ownership of companies with half of respondents expected to increase investment. The only asset class where more respondents expected to “stay the same” rather than increase allocation was offshore government debt, where 38 per cent plan to increase and 40 per cent plan to “stay the same”.
Andrew Lo concluded: “We are encouraged that investors in this survey are allocating to Chinese investments not only for portfolio diversification and performance but also as a means of enhancing their own organisation’s China expertise. This is creating an institutional base of knowledge among global investors that provides familiarity and confidence to invest in Chinese markets, and this is set to accelerate as barriers to entry fall and the market continues to liberalise. Moreover, any progress between the US and China in resolving their current trade dispute should further improve sentiment.”