Risk & Reward, Invesco’s award-winning quarterly publication on original investment insights, sat down with Andrew Lo, Senior Managing Director and Head of Asia Pacific, to talk about the recent China Position study, what the survey results mean, his views on China and what the future of investment in China could look like. With almost four decades of experience in the investment management industry, Mr. Lo has seen the landscape evolve over time, ushering in a meaningful and fundamental shift with the emergence of China.
Risk & Reward
According to the study, how are investors approaching China-related investment?
Despite the ongoing uncertainty and softening global economic sentiment, survey respondents appear focused on exploring the long-term opportunities in China. For example, amid ongoing trade tensions, some 68.4% of respondents still reported that they are planning to increase investments in China over the next 12 months.
We know that China is a large and rapidly growing economy that presents countless opportunities, and that’s stoking global investor interest. Indeed, 40.2% of respondents said that the growth potential of China’s listed companies is driving their decision for a dedicated investment exposure to China.
We also note that market transparency and greater accessibility are providing additional impetus. Respondents cited better corporate reporting, legal protections for foreigners and the sophistication of financial intermediaries as further reasons behind committing investment resources to China.
Overall, we think respondents are optimistic about China over the long run because it’s becoming easier to understand and access its markets. And that denotes a shift in investor sentiment towards China – until recently, China was seen as a source of capital, not an investment destination in its own right. Now, organizations see a clear need to carve out a specific allocation to China. This is a key development in China’s market evolution.
Risk & Reward
What have clients been telling you about investing in China?
There are two major themes I hear from our clients:
The first is that the index inclusion of Chinese equities and bonds is really making them take notice of the market, sometimes in a new light. Many have told us that, while they’ve been impressed by China’s continued economic growth and reforms over the years, they were still skeptical about the attractiveness of China. They had questions like – “Yes, I can see the good economic performance, but does this translate into investment returns for us?” or “What about government and state intervention?”
So, the inclusion is a starting point for them to think differently about the market. It motivates our clients to speed up their learning about and understanding of China. I think this is where we can help them by sharing our knowledge about how China can fit into their portfolios.
Secondly, the survey showed that there are some segments of institutional investors willing to forge ahead in terms of their China exposure, be that through dedicated mandates or ETFs. These are the ones who want to explore opportunities, and whom we often partner with – we have the experience and the know-how to guide them.
Risk & Reward
Are the survey findings in line with your expectations, or did they surprise you?
I think what immediately jumped out at me and my team was the bullishness with regard to investing in China, particularly in the current climate. That was a bit surprising. But taking a step back, we see that the direction, the trajectory the results show is consistent with our expectations.
This bullishness is heartening. It shows a willingness and a level of sophistication in how some global investors view China, particularly how access to China’s capital markets has improved over the years.
All this is very encouraging because it demonstrates a commitment to reforms on the part of the Chinese government, and already, through the survey results, we can see that investors appreciate these efforts.
Risk & Reward
How do the findings fit in with what we see happening around the world, in particular trade tensions?
The ongoing trade tensions cannot be ignored. You have the world’s two largest economies in disagreement over trade, which is an important growth engine for the global economy. There are also some deeper structural issues, such as knowledge transfer mechanisms between the two countries, that need to be resolved. If handled incorrectly, there will be serious implications for everyone.
We see this uncertainty coming through in the survey results. Although the overall tone of the survey results were bullish, respondents were more muted when asked about trade tensions – only 42% said that there would be a positive impact in the next 12 months, compared to 44% of respondents who have a negative view.
Personally, I’m more optimistic. I think the trade tensions are a chance for China to speed up market reforms. Historically, we’ve seen China push ahead with change whenever the country was at a major crossroads. This time, the Chinese government has been similarly measured and thoughtful in their policy responses. They are incentivizing innovation in the economy. They are keeping a tight lid on shadow banking. They are opening up financial markets even further – China recently announced that it would remove quota limits for offshore investors on two cross-border investment schemes: the Qualified Foreign Institutional Investors (QFII) and the Renminbi Qualified Foreign Institutional Investor (RQFII) schemes.