China Capital Markets: Moving Towards a Distinct Asset Class Allianz Global Investors Asia Conference Berlin, May 2017 Christina Chung, Senior Portfolio Manager Dianna Enlund, Senior Product Specialist
China Equities Becoming Too Large to Ignore 2
Audience question. 3
What we mean by China Equities? US SH SZ HK Total Market Cap (USD trillion) Number of Stocks Shenzhen A-Shares Shanghai A-shares China Stocks listed in HK US listed ADRs* Others Total Euro Area 3.2 3.6 2.6 0.6 0.0 10.0 6.2 2,002 1,316 588 333 126 4,365 5,254 Source: AllianzGI. Bloomberg. Data as of 26 April 2017. Euro Area Data is sourced from World Bank, as at 31 December 2017. * ADRs: American Depositary Receipts. 4
China equities: 2 nd largest by market cap Key Markets as % of Total World Equity Market Cap 70% United States Europe Japan China* 60% 50% 40% 42% 30% 20% 10% 0% 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 16% 10% 8% Source: World Bank, Allianz Global Investors, as at December 2016. * China refers to China A-Shares and Hong Kong -listed stocks. 5
but poorly represented in world indexes MSCI AC World Index Breakdown Japan 8% Others 16% China 2% US 52% Europe 22% China Equity: 16% World Equity Market Cap 2% MSCI AC World Index Source: World Bank, MSCI, Bloomberg, Allianz Global Investors, as at 31 March 2017. 6
China s has clearly signaled key policy direction President Xi Jinping, Davos, 2017 China is committed to a fundamental policy of opening-up We will intensify reform efforts in priority areas and key links and enable the market to play a decisive role in resources allocation We will expand market access for foreign investors China will keep its door wide open and not close it China has no intention to boost its trade competitiveness by devaluing the RMB, still less will it launch a currency war. Source: World Economic Forum, as at 17 January 2017. 7
China s equity markets increasingly accessible H Share Index and Key Financial Reform Measures >90% stocks in MSCI A Shares Index can now be bought directly without QFII / RQFII quotas Mutual Recognition of Funds China launches municipal bond market RMB moves to 2% daily limit RMB daily conversion limit removed for HK residents Shanghai - HK Stock Connect Interbank bond market opened for foreign investors RMB inclusion into SDR basket Circuit Breaker Rule introduced and suspended Shenzhen HK Stock Connect Source: Thomson Reuters, Allianz Global Investors, as at 30 November 2016. Past performance is not a reliable indicator of future results. 8
MSCI: To include or not to include? MSCI Emerging Market Index China A Share Inclusion Roadmap Current Status 5% Inclusion* 100% Inclusion* China 28% China 28% China 28% China A 1% China A 9% Getting closer - 2 major issues resolved, 1 outstanding China stocks will ultimately dominate MSCI s key Emerging Markets Index 50/50 chance this year but expectations low, so more upside than downside risk to markets Source: Goldman Sachs, Allianz Global Investors, as at April 2017. Inclusion estimate based on MSCI s proposal in April 2017 to include only 169 stocks. 9
Significant increase in sell-side A-shares coverage Number of China A Share companies under sell side research coverage, 2016 vs 2013 300 2013 2016 250 200 150 100 50 0 Morgan Stanley Credit Suisse Deutsche Macquarie JP Morgan Source: Allianz Global Investors as at 31 December 2016. 10
China Equities - Risks & Opportunities 11
Rising Domestic Leverage: Difficult to resolve, but near term risks manageable China build up domestic leverage RMB Trillion 180 Five Year CAGR 160 140 120 100 80 60 Household Debt 25% p.a. Government Debt 14% p.a. Corporate Debt 16% p.a. Systematic risks contained, but long term growth will need to come down Supply side reform is key to resolve the current debt problem 40 20 0 Expect to see rising defaults / asset quality issues in the banking system Source: Gavekal, Allianz Global Investors, as at January 2017. 12
China Equities: High valuations? China vs US Equity performance since Global Financial Crisis Index Current P/E 10 Year Avg MSCI China 12.7x 12.2x MSCI China A 15.0x 15.3x S&P 500 18.2x 15.3x S&P 500 MSCI China A-Shares MSCI China Source: Thomson Reuters DataStream, Allianz Global Investors, as at 4 May 2017. Past performance is not a reliable indicator of future results. 13
Not yet famous outside China, but already domestic leaders AMAZON.COM JD.COM TWITTER WEIBO MOUTAI DIAGEO Top 3 e-commerce worldwide Market cap: ~ $50bn 313 million monthly active users Market cap : ~ $11bn World s Most Valuable Liquor Brand Market cap : ~ $70bn Soruce: Wikipedia, China Internet Watch, CNN, Allianz Global Investors, as at May 2017. The above information is used for the purpose to demonstrate AllianzGI's research technique, it is not a recommendation or investment advice to buy or sell any particular securities and should not be considered investment advice. Past performance is no guarantee of future results. There is no assurance that any securities discussed herein will remain in the fund/portfolio at the time you receive the document. 14
China remains one of the most under-owned markets globally China Relative Weight vs Relative Performance within Global Emerging Market Funds 3,0% China Relative Weighting vs MSCI EM (LHS) China Relative Performance vs MSCI EM (RHS) 200 2,0% 1,0% 0,0% -1,0% -2,0% -3,0% -4,0% -5,0% 180 160 140 120 100 80 60 40 20-6,0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0 Source: EPFR country allocation, Factset, Morgan Stanley Research. Data as of Apr 20, 2017. * Fund weight as of February 2017. 15
Allianz China Equity - Historical Performance Allianz China Equity Allianz China A-Shares Equity 350 350 300 300 250 250 200 200 150 150 100 100 50 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Allianz China Equity MSCI China 50 2009 2010 2011 2012 2013 2014 2015 2016 2017 Allianz China A-Shares MSCI China A-Shares Source: AllianzGI, as at 31 March 2017. Past performance is no guarantee of future results. Individual performance will vary. Gross returns were calculated on a total return basis, including all dividends and interest, accrued income, realized and unrealized gains or losses, and are net of all brokerage commissions and execution costs, and do not give effect to investment advisory fees which would reduce such returns. Net returns, where appropriate, were calculated on a total return basis, including all dividends and interest, accrued income, realized and unrealized gains or looses, and are net of all brokerage commissions, execution cost, and investment advisory fees. Unless otherwise noted, index returns are presented as total returns, which reflect both price performance and income from dividend payments, if any, but do not reflect fees, brokerage commissions or other expenses of investing. 16
Key Takeaways 01 02 03 China representation in equity indices likely to increase significantly in next 3-5 years The opening up of A share markets means China is becoming too big to ignore Focus on consumer, technology, services for long term growth potential Source: Allianz Global Investors, as at March 2017. This document contains the current opinions of AllianzGI and its employees and such opinions 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 an indicator of future results. This document has been distributed for informational purposes only, does not constitute investment advice and is not a recommendation or offer of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but AllianzGI cannot guarantee that the information is accurate, current or complete. 17
China s Fixed Income Markets Moving towards a distinct asset class 18
China to become the second largest bond market in the world Debt securities outstanding in US$ trillions 40 38 30 20 14 China in 2020 10 9 6 0 US Japan China UK Source: BIS, Standard Chartered Bank forecasts, as at Q3 2016. Source: Standard Chartered Bank as at Q3 2016. The above is for illustrative purposes only and is not a recommendation or advice to buy or sell. Past performance is not indicative of future performance. 19
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Direct CIBM access without quotas RMB enters SDR basket at 10.9% RMB Bond futures contract Feb-16 May-16 Oct-16 Feb-17 Apr-17 2017 No restriction on inward and outward remittance Access to onshore FX derivatives China Bond Connect CIBM : China Interbank Bond Market / RMB : Renminbi / SDR: Special Drawing Rights 21
Growing importance in global bond indices Citi Emerging Market Global Bond Index % weight 100% 90% 80% 70% Others 60% Thailand 50% South Africa 40% Poland 30% Brazil China: 52.5% 20% Indonesia 10% 0% Current Mexico Pro-forma with China By Market Weight Pro-forma with China capped China: 10.0% Source: Citi Fixed Income Indices, Allianz Global Investors, as at 28 February 2017. The above is indicative only and based on preliminary assessments of the impact of China inclusion. The above is for illustrative purposes only and is not a recommendation or advice to buy or sell. Past performance is not indicative of future performance. 22
A wide range of opportunities and diversification benefits Citi China Government Bond Index in USD and EUR terms 25% USD EUR 22,8% 20% 15% 15,5% 10% 7,9% 5% 0% -5% 3,8% 2,2% 0,3% -4,1% 3,7% -4,6% -1,8% -0,6% -3,7% -10% 2012 2013 2014 2015 2016 2017 YTD Source: Bloomberg, Citigroup, Allianz Global Investors, as at 31 March 2017. The above is for illustrative purposes only and is not a recommendation or advice to buy or sell. Past performance, prediction, projection or any forecast, is not indicative of future performance. 23
China Bonds Becoming Too Large to Ignore 24
Disclaimer Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. Allianz China Equity is a sub-fund of Allianz Global Investors Fund SICAV, an open-ended investment company with variable share capital organised under the laws of Luxembourg. The value of the shares which belong to the Share Classes of the Sub-Fund that are denominated in the base currency may be subject to a strongly increased volatility. The volatility of other Share Classes may be different. Past performance is not a reliable indicator of future results. If the currency in which the past performance is displayed differs from the currency of the country in which the investor resides, then the investor should be aware that due to the exchange rate fluctuations the performance shown may be higher or lower if converted into the investor s local currency. This is for information only and not to be construed as a solicitation or an invitation to make an offer, to conclude a contract, or to buy or sell any securities. The products or securities described herein may not be available for sale in all jurisdictions or to certain categories of investors. This is for distribution only as permitted by applicable law and in particular not available to residents and/or nationals of the USA. The investment opportunities described herein do not take into account the specific investment objectives, financial situation, knowledge, experience or specific needs of any particular person and are not guaranteed. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer companies at the time of publication. The data used is derived from various sources, and assumed to be correct and reliable, but it has not been independently verified; its accuracy or completeness is not guaranteed and no liability is assumed for any direct or consequential losses arising from its use, unless caused by gross negligence or wilful misconduct. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail. For a free copy of the sales prospectus, incorporation documents, daily fund prices, key investor information, latest annual and semi-annual financial reports, contact the management company Allianz Global Investors GmbH in the fund's country of domicile, Luxembourg, or the issuer at the address indicated below or www.allianzgi-regulatory.eu. Please read these documents, which are solely binding, carefully before investing. This is a marketing communication issued by Allianz Global Investors GmbH, www.allianzgi.com, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, 60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). This communication has not been prepared in accordance with legal requirements designed to ensure the impartiality of investment (strategy) recommendations and is not subject to any prohibition on dealing before publication of such recommendations. The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted. 25