ucits aifmd gerard debenedetto
TRANSCRIPT
A combina*on of reforms is opening the mainland market and giving investors access to diverse asset classes, however, it’s not all good news.
Foreign Investment Into China – An Insiders View
UCITS & AIFMD February 24-‐25 2015
Gerard A. DeBenedePo [email protected] 917.679.5865 @GADnyc
v Stock Market Capitaliza*on – 2nd largest in the World v Fixed Income Market – 3rd largest v Precious and Industrial Metal Produc*on-‐ largest v Agricultural Commodity Produc*on -‐ largest v GDP – 2nd largest 15% of World measured in PPP v Internet users -‐ largest v Smart phones – largest v Pollu*on -‐ largest v Oil consump*on – 2nd largest v Recipient of FDI – 2nd largest v Alloca*on by global investors <1%
Too Big to Ignore – And Not Going Away
v RMB is Going Global • More than 1.2 Trillion RMB is outside of China • Freely traded with almost all restric*ons li`ed
v Programs to Enter China’s capital markets are becoming more varied • Ini*ally just FDI • Then QFII • Now RQFII • Stock Connect in Shanghai, soon in Shenzhen and Bond Connect • Eventually eliminate all quota programs • Currently $120 billion USD inbound, an expansion of $100 billion in 36 months
v RMB Centers Give Way to Full Conver*bility • Asset managers are launching products at record pace in a variety of jurisdic*ons and currencies • RMB to migrate to natural money centers • Asset and liability matching for China based en**es
Regulatory Changes are Mul*plying
v The RMB in China • Bank Deposits – 112 Trillion • Fixed Income Securi*es – 35 Trillion – US Fixed Income market is $36 trillion or 220 trillion RMB • Wealth Management Products 12.65 Trillion • Trust Products – 13 Trillion • Money Market Funds 1.9 Trillion • Bond Funds and Bond ETF’s 0.375 Trillion
The Rise of an Asset Class
Source: Bloomberg As of Feb 10
Sovereign 10 yr Gov’t Local Ra*ng Currency Vol
Germany 0.36% AAA 6.13%
US 1.99% AA+ 0.0%
Japan 0.38% AA-‐ 6.37%
China 3.43% AA-‐ 2.69%
Brazil 4.53% BBB+ 11.81%
India 7.72% BBB-‐ 5.01%
v Implied Government Guarantees • Usually at the point of sale • Leads investors to opt for the highest yield
v No real tested bankruptcy case • Government, issuing en*ty or sales channel has made investors whole • No “waterfall” of creditors established
v Large, informal trading network • Large dealer network • Many broken trades • Plenty of counterparty risk
v Ra*ng Agencies are Evolving but S*ll Need to Establish Credibility • There are five credit ra*ng agencies in China:
China Chengxin Interna*onal (a joint venture with Moody's ) China Lianhe (a joint venture with Fitch) Dagong Global Shanghai Far East Credit Ra*ng Shanghai Brilliance (in partnership with S&P)
Fixed Income Market Presents More Challenges/Opportuni*es
v Interest Rate Reform is S*ll Coming • Deposit rates are set by PBOC and has led to spectacular growth in Wealth Management
Products • Lending rates are also set, but new issuer rules con*nue to roll out
v Banks Require Cash keeping Short Term Rates High • Meet monthly CBRC repor*ng • Meet holiday cash withdrawals
v Short Term Deposits are Safer and Higher Yielding than Long Term Securi*es • PBOC’s interven*on and the floors/ceilings on deposit/interest rates • Bank branches must maintain their own balance sheet leading to big swings in liquidity • Innova*on from technology companies (Tencent, Baidu and Alibaba)
PBOC and CBRC S*ll Lag
v Funds and ETF’s • The largest “China” funds and ETF’s do not invest in A Shares • LiPle product differen*a*on and less client understanding • More than 100 “China” Funds and ETF’s in the US already
v China A-‐Shares Represent Broad Industries but Financials Dominate • 2600 listed companies (1000 in Shanghai, 1600 in Shenzhen) • The big 4 banks earn more than a third of ALL listed company profits (and the next 16, of
which 12 are financial service companies earn another third) • Vola*lity remains high – 30% annualized for large caps, double that for small caps
v Policies Will Harmonize Lis*ng • Some of the largest and best run Chinese companies do not trade in China • Stock Connect is more than an investment path, it’s the path to dual lis*ng • The “Sina” model for off shore lis*ng will end
Equity Product Prolifera*on
v Vague Investment Guidelines • Leads to huge variance from benchmark • Leads investors to grab the highest yielding securi*es • Evolving benchmarks
v Investment Methodologies and Opera*ons are not up to Global Standards • Subscrip*ons and redemp*ons • La*tude of the Investment Manager
v Liquidity and Concentra*on Risks • No standards and pressure for funds to own specific issues/names • More focus on yield than risk
v Insufficient Disclosure • Due diligence issues • Custodian Banks execu*on • Quarterly filing • Use of leverage
On Shore Managers S*ll Lack Global Standards
v Who is the largest manager of Chinese Equi*es • JP Morgan • Aberdeen • China AMC (华夏) • China Universal (汇添富)
v Excluding banks, what financial services sector manages the most money? • Asset Managers • Trusts • Securi*es Firms • Insurance Companies
v What is the largest A Share ETF listed in the US? • ASHR • FXI • PEK • GXC
Q&A