Chinese and international investors have their choice of worries when it comes to the country’s markets — among them a slowing economy, an escalating trade war with the United States, and a weakening currency, with the renminbi hitting a 10-year low last month.
“[The] main concerns are similar for both international and domestic clients, although domestic investors seem to have been more pessimistic in the past few months,” said Erica Poon Werkun, head of research at UBS’s Chinese affiliate UBS Securities.
The U.S.-China trade war and renminbi depreciation were cited as the country’s top external risks in a recent survey of 500 Chinese CFOs conducted by UBS’s Evidence Lab. Werkun said UBS expects the trade frictions to continue to negatively impact GDP growth, exchange rates, and corporate performance over the coming year. “Related uncertainties could also erode market confidence, especially if trade war escalates further,” she added.
Already, the valuations of both the onshore and offshore Chinese equities markets have significantly contracted since January, according to Werkun. And investors have largely shrugged off the central bank’s monetary policy easing, indicating that they don’t believe it is enough to prevent further slowdown.
“This year has been volatile in China due to external and domestic factors,” said Xiaopo Wei, head of China research at Citi. “The complexity of these has made it difficult for investors to forecast the market.”
While this volatility is likely to persist, it means that the more than 3,200 investment professionals who responded to Institutional Investor’s ninth annual All-China Research Team survey will be looking for ever-sharper insight from the country’s top equity research analysts.
“That is exactly why we have seen an overwhelming increase in the number of client requests asking for our help with investment decisions,” confirmed Citi’s Wei.
This year, respondents to II’s All-China Research Team evaluated research firms not just on the strength of their individual analysts, but their entire teams. Citi debuted at third overall in the new team-based ranking, tying for the position with Shanghai-based Guotai Junan Securities. UBS, meanwhile, took second.
But the clear winner was China International Capital Corp., whose analyst teams were recognized in 27 of the 28 investment sectors included in this year’s survey.
“The breadth and depth of our coverage gives us unique comprehensive insights into the developments of Chinese industries and companies,” said Hong Liang, chief economist and head of research at CICC. She noted that the firm’s 180-person team covers more than 1,000 companies across the country’s various share classes.
CICC also topped this year’s individual-based rankings for the seventh year in a row, with 55 analysts earning team positions, up from 38 last year. Citi and UBS each placed second in a four-year tie with with Bank America Merrill Lynch and Huatai Securities.
Just as equity analysts work to balance mainland and international views within their research, II has produced two additional rankings based on the differing perspectives between domestic and international investors.
In the China-only ranking of analyst teams, CICC once again comes up on top, leading a pack of domestic firms including Guotai Junan Securities in second and Huatai Securities in fourth. The best-performing international firm was UBS, which took third. The Swiss bank’s Chinese affiliate continues to invest in its research team with recent hires and an Asian build out of its Evidence Lab, a venture to harness big data insight.
Still, Liang believes that domestic firms like CICC have an advantage — though only up to a point. “They are close to the ground, and this helps them to capture the latest development at the company and sector levels,” she said. “However, to understand what is happening in China in the global context, we believe analysts should also have a global perspective and understand global trends.”
CICC appears to be succeeding on that point: International voters ranked the Beijing-based firm No.1 for its analyst teams, alongside Citi. “Citi has a strong commitment to research, especially to the China research franchise,” said Wei, who noted that the firm added 6 people to its China team this year.
Wei believes that China’s continued urbanization and rising middle class will be the main driving factor of future economic growth with consumption — including consumer, tourism, and healthcare — and technological innovation among the best investment opportunities. “The government is also focusing on improving income distribution and alleviating the tax and social security burden for low-income households, which should foster China’s transition to a consumption-driven economy,” he added.
UBS’s Werkun similarly cited consumer staples, healthcare, technology, and high-end manufacturing as bright spots in the current challenging environment. These sectors “will benefit from structural shifts in Chinese economy and consumption patterns,” she added.
The recent inclusion of China A-shares by index-provider MSCI this summer is a likely indication of what is to come.
“China has promised to further open up the financial sector to foreign capital, and both MSCI and FTSE are set to include A-shares at a faster pace in the coming years,” Wei said. “This will allow foreign investors to gain more exposure to many sectors and companies that are unique in the A-share market.”