Investing in China: Why now and how

Transcription

1 Investing in China: Why now and how May 24, 211 Rebecca Patterson, Managing Director, Chief Markets Strategist, J.P. Morgan Asset Management, Institutional , Howard Wang, Managing Director, Head of Greater China Team, JF Asset Management , John Garibaldi, Managing Director, Head of U.S. Institutional Advisory, J.P. Morgan Asset Management ,

2 Agenda Why China Why now How to invest Q&A 1

3 Will tightening ever end? Tightening will never end whilst surpluses exist, but the question really should be is it appropriate? Inflation will stay high in the near term Growth rate (% YoY) CPI Food "Core" CPI Property sector has not rolled over as social housing fills the private sector gap And structural inflation is inevitable as China doesn t invest so recklessly anymore 25% 2% 15% 1% 5% MSCI China Materials Net Margin MSCI China Materials Capex as % of Sales % Source: CEIC, UBS estimates, 28/4/211 Source: MSCI, Worldscope, Morgan Stanley Research estimates, 4/5/ Domestic steel consumption UBS construction index Floor space started & under construction Source: CEIC, UBS estimates, 15/4/211 Growth rate (% YoY)

4 All in all, it s a normalization process and it looks appropriate holistically-speaking RRR hikes are just maintaining status quo against surpluses Growth rate (% YoY 3mma) 8 Domestic contribution Foreign assets Reserve money growth (RRR adj) Sterilization While RMB lending and M2 are tracking nominal growth expectations Growth rate (% YoY) Growth rate (% YoY) Bank deposit 5 Bank lending Nominal GDP (RHS) Source: CEIC, UBS estimates, 15/4/211 Source: PBC, CEIC, UBS estimates, 15/4/211 3

5 Will China s growth stay strong forever? Well, forever is a long time but high growth is likely here in the medium term Economic Growth is Key for Job Creation Real GDP* Urban Employment * Shown as a 4-quarter moving average Source: BCA Research 211, 9/3/211 Plenty of Upside No. of Vehicles per 1, persons US Italy Germany Japan UK China Source: Macquarie Research estimates, 15/4/211 Energy Consumption is Still Low US South Korea Japan Germany China India Life Insurance Penetration Premium as % of GDP 16% 13.8% 14% 12% 1% 1.% 9.6% 7.8% 8% 7.2% 6.5% 6% 4% 2% 4.6% 3.5% 3.3% 2.3% 4.5% 4.5% 3.4% % Taiwan UK HK Japan France South Korea India US Germany China Europe Asia North America Source: EIA, BP and Thomson Reuters Datastream, BCA Research 211, 3/3/211 Source: UBS Research estimates, 8/4/211/ 4

6 Look backward when you are looking forward A historical perspective on China in the world Shifting Mix of World GDP (%) Western United Europe States Japan China India Source: Angus Maddison, The World Economy: A Millennial Perspective, OECD (21); IMF, Morgan Stanley Research, 6/1/29 NICs* During Their GEMS Phase 17% Growth US$ 98 NICs credit per capita China US$ * Newly industrialized country Source: World Bank, UN Data, IMF, Nomura Research China also Resembles the EU During its GEMS Stage 19 EU average change in consumption (US$ 5 per capita = 1) 15 China US$ Source: World Bank, UN Data, IMF, Nomura Research 5

7 Political season: It s not just the U.S. October 211 October th Plenary session of the 17 th Communist Party of China (CPC) Central Committee CPC Central Committee congress meets to select China s 18 th Central Committee ( ) This includes Party general secretary, Politburo and Standing Committee March 213 National People s Congress selects China s new government This includes President, Premier, State Council and many new ministers 2,987 members of the National People s Congress (legislative branch) up for re-election every five years by lower-tier assemblies President and Premier selected by 25-member Politburo (who oversee executive State Council) 6

8 China s 12 th Five-Year Plan details future growth efforts Source: JPMS LLC. Data as of March 211 7

9 Historically China has under-anticipated its own growth Target vs. actual Chinese GDP % growth: Past 5-year plans Source: HSBC. Data as of January 211; blue bars = actual growth; gray bars = planned growth 8

10 Internationalization of the renminbi (RMB) CNH deposits in Hong Kong increased by close to 38% in 21 alone, to approximately 3B RMB (45.7B USD worth). Source: JPMorgan Securities LLC J.P. Morgan forecasts that CNH bond issuance will reach 12mm CNH by end-211 (over 18.2B USD worth), over a 1% increase Source: JPMorgan Securities LLC 9

11 How will the investment universe evolve? China stock markets are still at the early stage of development US Stock Market (DJI) by Sector China Stock Market (MSCI China) by Sector Telecommunication Services, 4% Materials, 4% Consumer Discretionary, 1% Telecommunication Services, 11% Consumer Discretionary, 5% Consumer Staples, 5% Information Technology, 16% Consumer Staples, 13% Materials, 6% Information Technology, 6% Energy, 19% Energy, 12% Industrials, 8% Utilities, 2% Health Care, 1% Industrials, 24% Financials, 1% Health Care, 7% Financials, 38% The economy will change, as will capital markets Source: CEIC, UBS, MSCI, 31/3/211 1

12 Up and coming industries Alternative energy Natural gas will be the fastest-growing form of energy Natural gas consumption will surge from 4% to 1% of consumption in China China s primary energy consumption by % China China - 29 China - Targeted World Average Oil Natural Gas Coal Renewable bcm per annum Natural Gas Consumption (LHS) Natural Gas Proportion of Primary Energy 1%1% 9% 9% 296 8% % % 184 5% 149 4% 4% 4% 112 3% 3% 3% 3% 3% 3% % 2% 2% E 211E 212E 213E 214E 215E 216E 217E 12% 1% 8% 6% 4% 2% % Source: BP statistics, CEIC, Standard Chartered Research estimates, 1/3/211 Source: BP statistics, CEIC, Standard Chartered Research, 1/3/211 * as % of total natural gas consumption # E 27%* deficit translate into a 15% CAGR # for natural gas consumption 11

13 Up and coming industries Health care The market size for Cardio-cerebral Vascular drugs Hospital purchases of CCV drugs to register 26% CAGR in E RMB bn Traditional Chinese Medicines 3.4 Western Drugs RMB bn E 211E 212E 213E 214E Source: IMS, 13/12/21 E = IMS estimates; Source: IMS; Morgan Stanley Research, 8/12/21 Hospital beds per 1 persons Dietary supplement per capita consumption (US$) China 12 Latin America 1 8 Europe 6 Canada 4 2 United States Japan Germany France Korea United Canada United China Kingdom States Japan Source: World Bank Database, CLSA, 3/5/211 Source: CLSA, 3/5/211 Only 6% of GDP and 1% of stock market representing 1.3 billion of population 12

14 And risks may present opportunities 3 MSCI China 12M Forward PE 7-year Mean +1-std = std = MSCI China Oct 5 Sep % MSCI China Oct 8 Oct % /3 1 2/4 6/4 1 2/5 6/5 1 2/6 6/6 1 2/7 6/7 1 2/8 6/8 1 2/9 6/9 1 2/1 6/1 1 2/11 Buying China on dips is a rewarding trade Source: MSCI, Deutsche Bank, 29/4/211 Past performance is not indicative of comparable future results. 13

15 Manager selection is key when investing in China s public equity markets Equity market performance and Nominal GDP growth, Q4 27 present Equity market performance and Nominal GDP growth, 23 present Source: International Monetary Fund, Bloomberg, J.P. Morgan. Data as of April 211. Past performance is not indicative of comparable future results. 14

16 China s privately owned enterprises (POEs) are undercapitalized Gap in demand and supply of Number of POEs and aggregate profits have significantly grown capital in the private sector private sector contribution to China s GDP has grown from virtually it nothing 3 years ago to account for more than 66% of China s GDP today large number of privately owned enterprises need growth capital Profits (RMB bn) 1,5 1, Total profits of private enterprises* Total profits of state owned enterprises* # of registered POEs Source: State Administration for Industry & Commerce of PRC as of December 31, 21; National Bureau of Statistics, China Statistical Yearbook 21 ; *Applies to the enterprises with annual revenue from principal business over RMB 5 billion. **Total profits are as of November 3, 21. commercial banks lending is focused on government led State-owned commercial bank s short-term loans in 29 initiatives and not on private Private Enterprises and self-employed entities Others enterprises Source: Financial Times, AVCJ, Wall Street Journal Past performance is no guarantee of future results. Loa an Amount (R RMB bn) 5, 4, 3, 2, 1, Jan Feb Mar Source: People s Bank of China as of December 31, 29 Apr May 25 Jun 26 Jul 27 Aug 28 Sep 29 Oct 2 1** Nov Dec # of registered POE Es (mm) 15

17 Commodities a reasonable, if indirect, way to get exposure to China s growth Chinese middle-class growth a plus for commodities China production of key copper-containing products, Jan. 21=1 China now accounts for about 11% of global oil demand Vehicles A/Cs TV's Refrigerators Copper Products Source: China Automotive Information Net; CEN; CGA; JPMC LLC Source: Barclays Capital, 21 China s cyclical and structural growth (think strategic oil reserves) suggest a strong demand support for several key commodities in the years ahead Among the more liquid commodities, we would focus primarily on energy (crude oil), copper, and precious metals (gold, platinum and palladium) Supply constraints are as important to examine as demand drivers when investing in commodities 16

18 Why China: In summary Strong economic growth and attractive valuations should outweigh the impact of continued monetary tightening Political transformations underway in China setting the stage for future growth Steps taken to internationalize the RMB further encourage investment flows There are ample, attractive ways for investors to participate in China s economic future 17

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20 Thank you 19

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22 Disclosures This material is intended to report solely on the investment strategies and opportunities identified by J.P. Morgan Asset Management. Additional information is available upon request. Information herein is believed to be reliable but J.P. Morgan Asset Management does not warrant its completeness or accuracy. Opinions and estimates constitute our judgment and are subject to change without notice. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. J.P. Morgan Asset Management and/or its affiliates and employees may hold a position or act as market maker in the financial instruments of any issuer discussed herein or act as underwriter,,placement agent, advisor or lender to such issuer. The investments and strategies discussed herein may not be suitable for all investors; if you have any doubts you should consult your J.P. Morgan Asset Management Client Adviser, Broker or Portfolio Manager. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. You should consult your tax or legal adviser about the issues discussed herein. The investments discussed may fluctuate in price or value. Investors may get back less than they invested. Changes in rates of exchange may have an adverse effect on the value, price or income of investments. Diversification does not eliminate risk of loss or guarantee investment return. Risks associated with investments in China. Investments in portfolio companies organized din, or whose headquarters or principal i business operations are located in China present a variety of risks not presented by investments in portfolio companies in developed countries, including but not limited to risks associated with: (i) economic, political and social conditions; (ii) the Chinese legal system; (iii) currency risks related to the Renminbi; (iv) currency exchange controls; (v) regulations governing foreign investments; (vi) difficulties in exiting Chinese investments; (vii) competition for investments; (viii) Chinese accounting and disclosure standards; (ix) public health risks and natural disasters; (x) subsequent changes in the investment environment; and (xi) Chinese taxation. In general terms, the investment climate in China is less mature than in developed countries. While Beijing Equity Investment Development Management Co., Ltd. ( BEIDM ), the manager and general partner of the China Private Equity Fund, believes that the Chinese investment climate will develop in a favorable manner, there can be no assurance that this will occur, and an investment in the China Private Equity Fund should be considered riskier than an investment in a fund that invests in developed countries. Prospective investors should consider an investment in China only if they have independently determined based upon their own analysis that the risks and challenges of China-related investments are outweighed by the potential benefits. J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc. Copyright 211 JPMorgan Chase & Co. 21