Experienced Chinese equity investors like Victoria Mio know
that the countrys market is driven by government
policies. That is why the Hong Kongbased fund manager
makes two pilgrimages a year to Beijing to better understand
whats on the minds of senior policymakers.
[Click here to access the complete rankings of the 2011
All-China Research Team and read the profiles of the
region's Top Analysts].
After meeting with regulators in April, Mio who
manages the $693 million Robeco Chinese Equities fund
concluded that China will continue to enjoy strong real
gross domestic product growth and rising incomes, despite being
challenged by inflation. The Chinese authorities
remain confident about both the current strength of the economy
and the outlook for 2011, says Mio. Their policy
stance stays broadly stable but with a continued tightening
That relative stability is drawing institutional investors
from around the world at a time when many markets are wildly
erratic. However, few money managers are able to travel to
Beijing each year to meet with the countrys political
elite. Instead, they rely on published research from skilled
analysts, and the firm whose analysts do the best job of
covering Chinese equities is BofA Merrill Lynch Global
Research, according to participants in Institutional
Investors second annual All-China Research Team
survey. BofA leaps from fourth place after picking up four
positions, for a total of 12, and tripling its number of
analysts considered the best in their respective sectors, to
The U.S.-based banks strong upward momentum is
overshadowed by the even greater advance of China International
Capital Corp., which rockets eight places to share the
No. 2 spot with Citi, unchanged from last year; the two
firms capture nine positions each. Fourth place is also shared
by two firms: Deutsche Bank, which rises one notch, and Morgan
Stanley, which climbs two; they claim eight positions each.
Profiles of the top-ranked analyst in each of the
surveys 14 industry sectors and three macro disciplines
can be found on the pages that follow; profiles of the analysts
ranked second and third, along with a wealth of deeper data,
can be found on our web site, institutionalinvestor.com.
Results are based on responses from more than 1,670 money
managers and buy-side analysts at some 660 institutions that
oversee an estimated $782 billion in Chinese equities.
Although BofA declines to disclose the number of analysts it
has covering Chinese equities or the number of companies they
follow, the banks head of greater China research and the
No. 1 analyst in Energy, Thomas Wong, notes that the firm
has altered its approach to research in light of Chinas
emergence as a dominant player on the world economic stage.
China is no longer a stand-alone story, and its
importance to the global economy cannot be overstated,
says Wong, who is based in Hong Kong. It accounts for a
quarter of global growth, which means that your outlook for
China is a pillar of your worldview and vice versa. We
as a firm have aligned our greater China research team with our
Americas- and Europe-based global analysts to reflect this
and to ensure a more relevant context to our
BofA also emphasizes greater cross-sector and
cross-asset-class collaboration among its analysts.
Macroeconomic, strategy and sector-oriented research
are all about developing coherent investment theses that
integrate both top-down and bottom-up views, he
Case in point: David Cui, who climbs one rung to capture the
top spot in Portfolio Strategy, published a report in
January detailing Seven Market-Driven Themes for
2011. Among the issues the Hong Kongbased analyst
discusses are such macro concerns as financial reforms, fiscal
spending and sustainability of investment growth, global
quantitative easing and the currency war, and inflation.
Inflation is clearly front and center in
investors minds right now, and how long it remains there
will come down to how effectively the government can contain
inflation expectations, the BofA strategist told clients.
To position for inflation and tightening, we recommend
investors play defense that is, overweight sectors with
more predicable earnings streams. Cui also urged clients
to underweight interest-rate-sensitive sectors such
as real estate, which by the end of April had fallen behind the
broad market by 2.7 percentage points.
CICC analysts also place their Chinese equity coverage in a
global context, according to Beijing-based Jin Qiu,
co-head (with Haizhou Huang) of research. CICC research
has been committed to providing domestic and overseas clients
with the most forward-looking investment analysis, derived
from rigorous, independent, professional research on a global
platform, says Qiu. The firm employs 39 publishing
analysts, two more than last year, and they cover 172 stocks,
up from 151.
Citi has also been widening its China focus. The firm added
three analysts over the past 12 months, bringing its total to
32, and increased the number of companies they cover from 212
to 247. Since the breakout of the global financial
crisis, stocks have been moving in lockstep to a degree unseen
in the past, says China equity strategist Minggao Shen,
who works out of Hong Kong. As a result, clients start to
focus more on macro trends and policy outlooks while keeping an
eye on corporate fundamentals. Macro-themed research is
particularly important in timing the market and allocating
assets among sectors.
Take wage inflation, for example. After doing some
international comparisons, we realized that wage inflation is
largely driven by the rising demand for leisure once GDP per
capita exceeds $3,000 to $4,000, Shen says. If
true, wage inflation in China is unlikely to be a one-year or
two-year event; rather, its a medium-term
theme. Chinas nominal GDP per capita was $4,382 in
2010, according to the International Monetary Fund.
The Asian Development Bank predicts that inflation in China
will accelerate to a four-year high of 4.6 percent, on average,
this year, up from 3.3 percent last year. Despite signs of
overheating, Chinas economy is one of the drivers of
global growth, according to the Manila, Philippinesbased
lender, which forecasts the nations output will expand by
9.6 percent in 2011 (down from a sizzling 10.3 percent in 2010)
and ease back to 9.2 percent in 2012. Such growth rates are the
admiration of the economies of the entire industrial world,
which collectively are forecast to grow only 2.1 percent this
year and next, the development bank believes.
If those predictions prove correct, investor interest in
China isnt likely to dissipate anytime soon. Jiangqiao
(Michael) Tong, Deutsche Banks Hong Kongbased head
of research for Hong Kong and China, says his clients are
talking about much longer time horizons.
We have seen investors become more interested in new
investment themes for China over the next five to ten
years, Tong notes, citing education, energy and health
care as among the sectors generating the most enthusiasm. The
firm has 14 analysts who track 49 stocks roughly the
same numbers as last year at this time but expansion is
under way. Looking forward to the rest of this year, our
planned coverage for China stocks will increase by a
significant amount, he adds.
China may see even greater investor interest going forward,
if the forecast of Deutsche Banks Jun Ma, No. 1 in
Economics for a second year running and No. 3 in
Portfolio Strategy, are on target.
Structural changes are taking place in the right
direction and will over time enhance the roles of consumption,
services and high-end manufacturing in the economy,
says Ma, who is headquartered in Hong Kong. This is
partly driven by policies but, much more importantly, the
ongoing structural changes are now driven by market forces. For
example, the decline in the labor force especially the
younger-age labor force due to demographic changes
is leading to stronger wage inflation than before, and thus
will naturally imply faster consumption growth going forward.
This will happen regardless of government policies.
Rising wages will force change in the manufacturing sector,
Ma says, with high-end segments such as equipment production
getting a major boost thanks to rising demand for automation.
In March, Ma dubbed Hong Kongbased resort operator
Shangri-La Asia and two outfits headquartered in Shenzhen,
Guangdong Ping An Insurance (Group) Co. of China
and telecommunications-equipment manufacturer ZTE Corp.
our favored names in the services and
high-end-manufacturing sectors for the remainder of
this year. By the end of April, Shangri-Las shares had
advanced 7 percent and Ping Ans had risen 4.4 percent,
but ZTEs had taken a tumble, falling 24.1 percent. During
the same period the broad market gained
Ma, who was bearish on Chinese equities from the autumn
of 2009 through March of this year, is decidedly bullish
and hes far from alone.