Asia Opportunities

China opens up for pioneers Prescient

Chinese Currency
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The China Securities Regulatory Commission (CSRC) has granted Prescient Investment Management a licence to buy Chinese stocks and bonds, opening the way for the group to apply its philosophy to a market well suited to the quantitative investment style.

Prescient’s licence was granted under the Qualified Foreign Institutional Investor (QFII) scheme. China has stepped up efforts to expand the QFII programme, which it launched in 2003 to allow foreign investors to buy Chinese securities as part of a broader reform of the country's financial markets. 

Liang Du of Prescient Investment Management explained: “The Chinese capital market has historically been closed to foreign investors, but the investment quotas allow asset managers to invest in Chinese shares on the Shanghai and Shenzhen stock exchanges.

“Without the quota, investors would have access to roughly 150 Chinese companies that are dual listed or listed in Hong Kong. With the quota, investors are able to buy almost 2 000 shares in mainland China, accessing companies that would otherwise not be investable.”

Mr Du explained that the QFII programme has been successful, with companies that have been given quota’s generally investing for the long-term rather than speculating.  China has tended to adopt a slow but steady approach to liberalising markets.

He said that Prescient Investment Management applied for a licence because of the potential it sees in China. 

“Our investment philosophy is focussed on delivering real returns and upside relative to downside risk. In 2007 the Chinese stock market was roaring ahead trading at PEs of 50 versus the rest of the world at around 15 or 16. This level of overvaluation was pricing in Chinese growth of 8.5% higher than that of the other countries for the next 15 years - too bullish a scenario even for the great China.  

“Today the situation is the complete opposite with China one of the worst performing markets since the crash. In spite of earnings which grew by 70% since the crisis, the share market remains around 30% lower than its peak. This represents a great opportunity.”

From an economic perspective, the Chinese population is getting wealthier. Yet unlike Japan in the 1990s when GDP per Capita was around 80% of the US and EU, China’s GDP per capita is still at about 15% of the US, EU, and Japan. As a result, there is significant scope for the Chinese to continue growing.

“Another factor that makes it attractive to developed markets as well as African investors is how uncorrelated the returns of China are compared to South Africa and the developed world.  Globalisation has played a large role in recent times with the domestic market trading in a correlated manner with the US, EU, Brazil and India. China remains the outlier, trading in a different pattern to the rest.  

“On a fundamental level, the US and EU are the world’s consumers. South Africa, Brazil and Russia are the commodity producers and China is the world’s factory. The combination of good valuations and low correlation make China an attractive investment to include in a portfolio.” 

Mr Du noted that the Chinese market is dominated by forecast driven, bottom up research based investment vehicles. The licence allows Prescient to bring its philosophy into the Chinese market which, with over listed 2 000 stocks and high liquidity, is ideally suited to Prescient’s quantitative investment style.

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