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National Conference on Public Employee Retirement Systems

How US public pension investors can harness China’s fast‐growing “new economy”

NCPERS 2019 Annual Conference & ExhibitionMay 22Austin, TX

Doug EuUS CEOAllianz Global Investors


Today’s presentation will discuss…

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Why the China A-shares opportunity is transformational

Why institutions should invest in China now

How institutions should allocate to China


Chinese equity markets are evolving

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ProxiesOffshore

China (H-shares/

ADRs)

QFII + RQFII

Stock Connect

programs

MSCI adds A-

shares to indices

Transformational


Growth of the China A‐shares market

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Source: http://english.sse.com.cn/indices/statistics/historical/RMB/USD$ Rate as of 12/31/1990, 12/31/1998, 12/31/2008 and 3/31/2019

Number of listed companies 8 438 864 1,458

$7 billion $128 billion

$1.425 trillion

$5.2 trillion

1990 1998 2008 2019

The market cap of Shanghai-listed A-shares has grown exponentially

Transformational


China now offers foreign investors a larger opportunity than Europe

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Source: Nasdaq, Bloomberg, Allianz Global Investors, as of December 31, 2017. Only the market cap of the listed share class by exchange is included. Offshore China stocks are defined based on companies with ultimate parent domiciled in China. Suspended stocks are excluded. Euro Area Data is sourced from World Bank.

ShenzhenA‐shares

ShanghaiA‐shares

China stockslisted in HK

US‐listedADRs Total Euro Area

Market cap (USD tn) 3.6 5.0 2.8 0.8 12.2 7.9

Number of stocks 2,123 1,434 737 186 4,480 4,750

Transformational

National Conference on Public Employee Retirement SystemsNational Conference on Public Employee Retirement Systems

WHY CHINA?

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A‐shares can add diversification due to low correlations with major equity markets

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As of March 31, 2019Correlation data is calculated based on historical return of respective MSCI indices for the past 10 years, using weekly USD return. US equities is S&P 500 index, European equities is MSCI Europe Index, World equities is MSCI World Index, Global Emerging Markets equities is MSCI Emerging Markets Index, HK-list China stocks is MSCI China Index.Source: Bloomberg, Allianz Global Investors , eVestment

China A‐shares

US equities 0.30

European equities 0.29

World equities 0.32

Global Emerging Markets equities 0.41

HK‐listed China stocks 0.58

Why China


Regulators restrain foreign competition

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Why China

Some or all the securities identified and described may represent securities purchased in client accounts. The reader should not assume that an investment in the securities identified was or will be profitable. The securities or companies identified do not represent all of the securities purchased, sold, or recommended for advisory clients. Actual holdings will vary for each client. FAANG is an acronym widely used on Wall Street and among many investors; it stands for four high-performing large-cap technology companies – Facebook, Apple, Amazon, Netflix and Google (now Alphabet) – that are also household names. BAT is a similarly widely used acronym for three large-cap tech companies in China: Baidu, Alibaba and Tencent.


Beijing’s China 2025 Plan is moving toward domestic domination of critical high‐tech industries

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Source: US Chamber of Commerce, Made in China 2025 Plan (2017))

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Strategic new materials

New-energy vehicles

Renewable energy equipment

Computer numerical control machines

Industrial robotic components

Mid- and high-end medical devices

High-end agriculture equipment

Mobile communication chipsets

Wide-body aircrafts

2020 2025

Why China


Chinese firms already dominate the local smartphone market, displacing foreign brands

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Smartphones made by Chinese makers are squeezing out foreign brand names

As of June 30, 2018Source: Allianz Global InvestorsSecurities named above were listed since they were the top sellers (as of 6/30/18) of smartphones in China. Some or all the securities identified and described may represent securities purchased in client accounts. The reader should not assume that an investment in the securities identified was or will be profitable. Securities or companies identified do not represent all of the securities purchased, sold, or recommended for advisory clients. Actual holdings will vary for each client.

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20%

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60%

80%

100%

1Q08

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Huawei, Oppo, Xiaomi, Vivo

Other domestic brandsNokia, Motorola, Sony

Apple, Samsung

Other foreign brands

Why China


A‐shares reflect faster‐growing “new economy” sectors

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As of June 30, 2018 Data analysis based on the MSCI All China Index (broken down by sector and stock exchange).Source: Citi, Allianz Global Investors

Market capitalization of Chinese companies by sector, in USD trillion

$0

$5

$10

$15

$20

$25

$30

Financials ConsumerDiscretionary

TelecomServices

Industrials IT ConsumerStaples

Real Estate Materials Health Care Energy Utilities

China-listed Hong Kong-listed US-listed

Why China


Evolving consumer trends among Millennials especially favors domestic Chinese firms

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Source: Allianz Global Investors

Tourism and leisure is growing rapidly

Retailers are adding disruptive online capabilities

Healthcare spending should soar

Consumers are ditching foreign products for domestic ones

Why China


The valuation gap between A‐Shares and MSCI’s Emerging Market index highlights the opportunity

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Source: Bloomberg as of March 31, 2019

0.000

50.000

100.000

150.000

200.000

250.000

300.000

350.000

400.000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

MSCI China A Onshore Net Return Index MSCI Emerging Markets Index

Why China

National Conference on Public Employee Retirement SystemsNational Conference on Public Employee Retirement Systems

HOW TO INVEST IN CHINA A‐SHARES

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China A‐shares are substantially under‐represented in the MSCI Emerging Market index

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As of March 20192019 is scheduled to happen in May, August and November 2019, with China A-share mid caps included from November 2019.*Middle chart is based on MSCI’s proposal in May 2018 to include 233 large-cap China A-shares stocks into MSCI Emerging Market index. **Right chart is based on the assumption that all China stocks are available to be included in MSCI Emerging Market index. A 85% discount factor was utilized which should approximately represent the large- and mid-cap universe within China A-shares.Source: MSCI, Bank of America Merrill Lynch, Allianz Global Investors

5% inclusion factor20% inclusion factor over 3

stages in 2019

100% inclusion based on current index constituents (233 China A large

caps)

100% inclusion, assuming all

existing large-cap and mid-cap China

A-shares are included

0.8% 3.3%

15.0%

29.0%

2018 2019 Scheduled Anticipated* Anticipated**

How to invest


Adding A‐shares to EM allocations can enhance the risk/return profile of a portfolio

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Chart shows analysis of returns for the MSCI Emerging Market index (used as proxy for global emerging markets) and MSCI China A Onshore index (used as proxy for the China A-share market) indices from February 29, 2004 to February 28, 2019. Percentages shown on the chart represent portion of portfolio allocated to China A-shares. Allocations shown of the MSCI Emerging Markets Index and the MSCI China A Shares Index represents hypothetical non-investable portfolios. The chart is provided for illustrative purposes only to analyze the various allocations of the two indexes, does not represent actual performance, and is not indicative of future results. Source: Allianz Global Investors

Global Emerging Markets

10%

20%

30%

40%50% 60% 70%

80%

90%

China A-Shares

8.0%

8.5%

9.0%

9.5%

10.0%

20% 22% 24% 26% 28% 30% 32%

Annu

aliz

ed re

turn

Volatility

How to invest


Active matters in China A‐shares

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Source: eVestment, MSCI China A Onshore-ND Index vs the eVestment RDFQII/QFII China A Shares Universe, returns as of 3/31/19. Past performance is not indicative of future results.

eVestment RDFQII/QFII China A Shares Universe1 Year

Return3 Year

Return5 Year

Return10 Year Return

Median Manager In Universe -4.18% 14.45% 17.55% 10.94%

MSCI China A Onshore Index -9.23% 0.95% 8.44% 4.75%

Alpha of Median Manager 5.05% 13.50% 9.11% 6.19%

MSCI China A Onshore Percentile Rank(1 best, 100 worst) 88 99 100 99

How to invest


Market environment: disclosure

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Past performance is not indicative of future results, which may vary. There is no guarantee that any opinion, forecast or objective will be achieved. The information herein is provided for informational purposes only and should not be construed as a recommendation of any security, strategy or investment product, nor an offer or solicitation for the purchase or sale of any financial instrument.

References to indices, benchmarks or other measures of relative performance are provided for your information only. References to such indices do not imply that managed portfolios will achieve returns, or exhibit other characteristics similar to the indices. Index composition may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, sector exposure, correlations, or volatility, all of which are subject to change over time. Unless otherwise noted, equity index performance is calculated with gross dividends reinvested and estimated tax withheld, and bond index performance includes all payments to bondholders, if any. Index calculations do not reflect fees, brokerage commissions or other expenses of investing. Investors may not make direct investments into any index. Index data contained herein (and all trademarks related thereto) are owned by the indicated index provider and may not be redistributed. The information herein has not been approved by the index provider.

This material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Forecasts are inherently limited and should not be relied upon as indicators of future results. References to specific securities, issuers and market sectors are for illustrative purposes only. The asset and industry reports contained herein are unaudited. The summation of dollar values and percentages reported may not equal the total values, due to rounding discrepancies. Unless otherwise noted, Allianz Global Investors U.S. LLC (formerly, Allianz Global Investors Capital) is the source of illustrations, performance data, and characteristics.

Allianz Global Investors U.S. LLC (“AllianzGI US”) is an SEC-registered investment adviser that provides investment management and advisory services primarily to separate accounts of institutional clients and registered and unregistered investment funds. AllianzGI US manages client portfolios (either directly or through model delivery and wrap fee programs) applying traditional and systematic processes across a variety of investment strategies. AllianzGI US may also provide consulting and research services in connection with asset allocation and portfolio structure analytics.

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