Bank of Singapore positive on China amid regulatory pain

Sep 23, 2021

CHINA'S heavy-handed clampdown across sectors has knocked market sentiment in recent months, fanning fears of more regulatory implications to come.

Still, despite near-term caution, Bank of Singapore remains long-term positive on the market, viewing the barrage of fresh measures as an important transition for the country rather than a negative policy.

The private bank is, for now, maintaining a neutral position on China amid the "surprising" pace of policy roll-outs, but "neutral doesn't mean negative", said Jean Chia, the private bank's chief investment officer (CIO) and head of portfolio management and research office.

While actual trading volumes of Chinese equities and bonds have come down, the bank's overall exposure to the market has not been impacted.

"We're still very invested. It's just a wait-and-see approach... a message to say we are cautious and probably going to be a lot more selective in how we invest," Ms Chia told The Business Times in an interview.

"Many companies are on our radar in terms of the right valuations and their response to policy, but we don't think we're out of the woods yet. We're still studying very closely."

Bank of Singapore currently favours China's A-share market over the H-share and ADR (American Depositary Receipts) markets, as industries represented in the A-share market are less exposed to the government's tighter scrutiny for now.

The bank has maintained its exposure to longer term structural trends such as domestic consumption, renewable energy and new infrastructure, which are aligned to China's policy support and environmental objectives, said Ms Chia.

Beijing's tightened grip on sectors ranging from e-commerce and private education to gambling and healthcare has led to record stock sell-offs in recent months. The escalating volatility has pushed investors to re-position their strategy and scour for new opportunities.

Ms Chia said that the regulatory curbs are not surprising, in line with President Xi Jinping's call for common prosperity and stable growth.

"The fact that they have to balance rapid growth with things like social inequality, the plight of gig workers, data protection issues, monopolistic behaviour... all these are not new. We've seen it in the US and Europe, time and time again for decades. If China were to become a much more developed capital market, it's important to address these issues."

In the near term, Ms Chia flagged that the next few months are still "full of potential risks" from a regulatory perspective, with more restrictions expected to surface.

"There was a big correction (earlier) and everyone was asking whether that was a time to come back to the market and start to bottom fish. Our view is that it's still not time yet, we are still seeing a few waves of policy announcements coming up, with regard to data protection especially," she told BT.

Drawing reference from previous regulatory cycles that span between 12 to 18 months, China is likely still in the middle of its crackdown.

Investors should brace for further volatility in capital markets escalated by potential default risk of Evergrande, China's second largest property developer and the largest high-yield USD bond issuer in Asia.

Contagion fears had resulted in a risk-off start to the week as global stock markets tumbled sharply.

"Currently, our base case is contagion risk from China's high yield property bond market will be relatively contained, but there are several moving parts," said Ms Chia.

Meanwhile, the rapid spread of the Delta variant has threatened to thwart economic recovery, especially in countries with weaker healthcare systems and lower vaccination rates.

Bank of Singapore has downgraded its gross domestic product growth forecasts for Indonesia, Malaysia, the Philippines and Thailand; the four economies are expected to record combined growth of just 2.9 per cent in 2021, compared to 6 per cent for the global economy.

But Ms Chia pointed out that markets are now less sensitive to the risks that new variants pose amid vaccine roll-outs and testing regimes.

"We're not saying it's going to be a non-event, but the ability to adapt has gone up significantly globally, so I think we will get through any potential impact for now. The path to recovery will be unknown, but I think we are better able to assess the sensitivity of companies in terms of negative impact," she told BT.

Heading into the final months of the year, Bank of Singapore is keeping a moderately risk-on stance with an overweight position on equities with a preference for US equities.

In fixed income, it remains overweight in emerging market high-yield bonds where valuations still look relatively attractive and offer a buffer against rising rates.

Amid heightened focus on decarbonisation efforts globally, the private bank is also doubling down on ESG (environmental, social and governance) investments.

It has seen a 25-fold increase in ESG-focused investment funds from a year ago, with sustainable investments accounting for over 50 per cent of its assets under management as at end-May this year.

"This is what is going to move the needle for us in terms of investments," said Ms Chia. As an example, the bank is looking at companies using hydrogen in their processes as part of their transition.

While Europe may lead in ESG, Ms Chia reckoned that opportunities could lie in Asia's emerging markets where companies are least advanced in adopting sustainable practices.

"There could be situations where some companies are poorly rated today because that's their starting point. But if we see that the evolution of that rating is on the positive side due to actions they're taking to decarbonise and improve the transition strategy, I think those are companies we want to look at. If we identify the leaders early, then we can have an ESG alpha," she said.

Bouts of market volatility in the first half of 2021 have underscored the importance of stock and credit selection, as well as portfolio diversification. "Not just sector, regional diversification but cross-asset investment styles and access to ESG investment and alternatives," said Ms Chia.

Investors are rethinking the way they manage their wealth, shifting away from trading in high-beta markets towards a more professionally-managed approach to their assets.

Bank of Singapore's combined assets grew by over 20 per cent over the year, which comprises both discretionary and advisory portfolio management assets.

"There is increasing recognition that you need to take emotion out of investing and look at things in a more disciplined and holistic way. Today's game is tomorrow's loss if you're not careful,' said Ms Chia.

https://www.businesstimes.com.sg/ban...egulatory-pain