Vontobel Conviction Equities Boutique
Concentrated and fundamentally driven high-conviction equity portfolios managed by four teams specialized in emerging markets, impact investing, thematic investing, and Switzerland.
Foreign investors appear to have interpreted the composition of the newly appointed Standing Committee as offering less likelihood of a change in policy direction on the government’s dynamic zero-Covid stance and a greater focus on the economy, which are the consensus preconditions for a recommitment to Chinese equities. However, the announced policies were in-line with expectations and there were no negative surprises that would warrant such a market action.
Price action on Monday was akin to the mid-March market capitulation and has taken the implied equity risk premium to 10.7%, the highest since 2008. We consider a slightly higher than the average of recent years risk premium for Chinese equities to be justified due to uncertainty about the continuation of less business-friendly and more ideological policies. However, the outcome of the National Party Congress does not change the fundamentals of companies overnight.
While we do not expect the Zero Covid policy to end, which would be a big positive for the markets, we believe China’s leadership will continue to follow a policy of “gradual relaxation”. However, we expect positives in the following areas:
Consensus expects this to lead to a recovery of GDP growth to +5.0% next year (from 3.3% in 2022E). We are already seeing the first signs of such an improvement by looking at economic indicators such as M2 money supply growth and the Li Keqiang Index (weighted average of annual growth rates in outstanding bank loans, electricity production, and rail freight volume) which have turned positive over the last weeks. In addition, valuation is attractive at roughly 1 standard deviation below historical multiples.
Our Chinese holdings in our investment strategy “mtx Sustainable Emerging Markets Leaders” have a ROIC that is expected to rise by 3.3% year-on-year in FY23E on a weighted basis. This compares to 1.5% for the MSCI EM Index. This improvement is predicated on approximately 10% weighted average EPS growth and implies a weighted average upside potential of 33%. We believe this justifies the positions in these stocks as well as it explains the current overweight. However, if policies were to change in a way that would have a negative impact on our companies' business performance, we would lower our assumptions accordingly and make portfolio adjustments if necessary.
Certain information herein is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. We believe that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, there is no assurance that estimates or assumptions regarding future financial performance of countries, markets and/or investments will prove accurate, and actual results may differ materially. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions. Past performance is not a reliable indicator of current or future performance.