The world turns its attention to China which seems to be the fastest emerging country from the Covid-19 crisis. Neuberger Berman believes the timing to allocate more assets in China is opportune now. Especially the China A-Share market is worth looking at, says Ning Meng, Neuberger Berman’s China A Share Strategy Leader.
AsiaFundManagers.com: China seems to be recovery pretty fast from the Covid-19 crisis. To what extent has the capital market anticipated this development?
Ning Meng: The A share equity market performance this year has been driven by the abundant liquidity in markets, not by fundamental economic recovery. The situation is similar to the US markets.
However, we believe fundamental changes are reflected in individual sector performance. For example, consumer sector has outperformed due to demand recovery and healthcare services sector has outperformed due to response to Covid-19. Meanwhile, export-related and cyclical sectors have underperformed.
Markets are constantly changing and will reflect fundamental economic situation and policy changes. Currently, markets reasonably reflect the economic and political environment, but there will be increasing pressure if the economic recovery fades next year or if the government steps back on fiscal/monetary policies.
AsiaFundManagers.com: We are currently seeing falling profits and rising share prices – where is the upside potential for further price growth?
Ning Meng: We believe stock valuations appropriately reflect corporate fundamentals. For example, industries that had limited impact from or even benefited from the Covid-19 crisis saw their valuations expanded.
Meanwhile, shares prices of those cyclical companies fell owing to earnings pressure. Financial and real estate sectors also underperformed given profit decline.
As such, the stock market is effectively reflecting earnings direction, but there is room for the market to reflect the appropriate level of change in fundamentals.
In contrast, we should be concerned if valuation has more than priced in fundamentals.
AsiaFundManagers.com: Neuberger Berman brings the China A Share Equity Fund in UCITS format to Europe. Why now?
Ning Meng: First of all, from a near term perspective, China is amongst the world’s first to recover from the Covid 19 pandemic. Many leading Chinese companies are taking market share in global supply chains, offering attractive investment opportunities in many sectors.
Secondly, China is a large economy that is rapidly growing. China A-share equity market is the world’s second largest equity market, but accounts for only a small proportion of global asset allocation. We believe the timing to allocate more assets in China is opportune now.
Thirdly, what NB brings to investors is not just short-term investment results, but more importantly, it’s the investment philosophy in investing in China for the long term. This requires a trusted process which has been tested and a strong team-based approach.
AsiaFundManagers.com: What perspectives does the China A Share market offer?
Ning Meng: China A share market cap is larger than H-share market, and the liquidity of A-share market is also much higher than H-shares. As of Dec 31, 2019, the total market cap of China A shares is US$8.5 trillion vs Hong Kong Stock Exchange US$4.9 trillion. The average daily trading volume of China A share market is US$79.7 billion vs HK Stock Exchange US$US$7.6 billion.*
A-share market is a more diverse market with a broader set of opportunities for investors to tap into China’s rapidly growing economy. Meanwhile, H-shares is more concentrated in financials and technology companies.
The Hong Kong stock market will be more impacted by global capital flow, while China A share market is relatively immune, benefiting investors’ diversified asset allocation.
As such, A-share equity market overall provides a better overall perspective of China’s economy. Additionally, more and more ADR companies are relisting in A share or dual-listing in A & H share markets, offering even more investment opportunities for investors.
AsiaFundManagers.com: What are the unique selling points of the Neuberger Berman China A-Share Equity Fund?
Ning Meng: NB has an experienced local team based in Shanghai who can conduct deep research on local companies extensively, capturing the long term growth opportunity and at the same time better understand local companies’ fundamentals and better manage risk.
Compared to local asset managers, NB’s investment philosophy and style is more focused on long-term, quality, value-add and tracking error, providing long term stable investment returns to investors. Additionally, the investment team can leverage NB’s centralized equity research as well as insights from established NB Emerging Market Equities team, allowing the team to have better cross-region and cross-sector insights and build stronger conviction.
AsiaFundManagers.com: In which shares do you invest? How does your investment process look like?
Ning Meng: We focus on two key areas: Consumption and advanced manufacturing.
China has the world’s largest population, and as wealth accumulates, there is significant room for consumption upgrade. As such, we see stable growth potential in Consumption and Healthcare related sectors. Additionally, China’s advanced manufacturing sectors are growing rapidly and are taking more global market share in electronics and electric vehicle supply chains. This is also an area where we see attractive investment opportunities.
AsiaFundManagers.com: Thank you very much for the interview.
*Data source: Goldman Sachs Research
Ning Meng joined Neuberger Berman in 2019. He is the firm’s China A Share Strategy Leader, based in Shanghai, and a Senior Portfolio Manager on the Emerging Markets Equity team. Prior to joining the firm, he was with HFT Investment Management, where he most recently served as Chief Investment Officer, Chief Executive Officer of HFT HK, and Head of International Investment. In that role, he was responsible for portfolio management and investment advisory for HFT HK, and its QFII and RQFII clients.
Meng received his master degree in Economics and Financials from York University UK and a BA in Economics and International Trade from Nanjing University China.