Xu Ying, co-founder and CEO of Fang Ying Research and Investment (Hong Kong) Co., Ltd. shared her views on the fundamentals of China's economy at the Hong Kong Financial Forum of Yanji Hong Kong on November 4.
Starting with the cyclical rate of Hong Kong's bull market over the past 30 years, Xu Ying analyzes the profound changes in China's economic fundamentals and points out that Chinese stocks are likely to enter a new round of bull market. She believes that the Hong Kong stock market has also benefited from the dual confluence of Chinese capital outflows and international capital investment in high-quality Chinese stocks, and Hong Kong stocks and A-shares have the potential to become the best investment market in the world in the next decade.
Xu Ying, co-founder and CEO of Fang Ying Research and Investment (Hong Kong) Co., Ltd.
The following is the content of Xu Ying's speech:
Chinese stocks became the dazzling stars of emerging markets in 2017, with the MSCI China Index and the Hang Seng Index outperforming global stocks for the first time since mid-2015, up 48.9 per cent and 32.2 per cent in the year to October. In the face of the excellent performance of the Chinese stock market, the key question now is: has the Hong Kong / Chinese stock market reached a high point? Or have you just entered a bull market? We don't have good divination to predict the future, and history is undoubtedly the best teacher.
Cycle rate of Hong Kong bull market in the past 30 years
Hong Kong has experienced four bull markets in the past.
The first bull market (1989-1993): + 404% the longest (63 months) bull market in 30 years, driven by the second wave of China's political and economic reform and opening up.
The second bull market (1995-1997): + 142% for 29 months, starting with the Chinese concept of "red chips" and ending with the Asian financial crisis.
The third bull market (1998-2000): + 149%, the shortest bull market (only 2 years), followed by the dotcom boom and the bursting of the dotcom bubble.
The fourth bull market (2003-2007): + 328%. The second longest (55 months) bull market in Chinese stocks in 30 years, with the strongest fundamental support: real estate reform and China's accession to the WTO.
Analyzing the cycle rate of the bull market over the past 30 years, two key points are crucial:
First, the big bull market in Hong Kong tends to occur after a major crisis, which is very similar to the US stock market. For example, the longest bull market in 1989-1993 began after the 1989 crisis, the second bull market in 1998-2000 followed the Asian financial crisis, and the most recent bull market (2003-2007) occurred after a series of major crises, including the bursting of the dotcom bubble in 2001, the three-year plunge in Hong Kong's property market and the SARS epidemic in 2003.
Second, once China advances the process of real reform after the crisis, it tends to lead to a bull market with more time and higher gains for CK Hutchison. Conversely, if a bull market is not based on solid fundamental improvement, but on concepts or other external factors, it tends to be short-lasting and limited. For example, the shortest bull market in 1998-2000 lasted only 23 months and was triggered by the TMT/ Internet concept; the second short-term bull market in 1995-1997 was based on the concept of "red chips" and was expected to inject the concept of mainland assets cheaply. Instead, the two longest bull markets have been driven by real political and economic reforms. The first 63-month bull market in the early 1990s stems from a new wave of economic reform and the accelerated pace of opening up, especially marked by the establishment of four special economic zones; the latest 55-month bull market, which lasted from 2003 to 2007, rose by 328%, mainly driven by the reform of China's real estate market and China's accession to the WTO in 2002.
Profound changes in China's fundamentals
Before discussing the direction of China-related stock markets over the next decade, take a look at the profound changes in the fundamentals of China's economy:
First, China's knowledge economy, clean economy and new urbanization with the urban "one-hour economic zone" as the core will serve as engines to promote high-quality and sustainable growth in the next decade.
Second, China is rapidly becoming an important innovation center in the world. In the Shenzhen-Hong Kong-Macao Bay area, representative companies such as Huawei and DJI take the lead, driven by the capital markets of Hong Kong and Shenzhen, while in the Hangzhou-Yongwan area, many Internet companies take the lead, driven by Shanghai stock, bond, currency and commodity trading markets.
Here are several sets of data:
China's R & D expenditure as a share of GDP rose from 1 per cent in 2000 to 2.1 per cent in 2016, with GDP growing at an average annual rate of more than 8 per cent over the same period. If you look at the growth of real R & D investment, it is even more striking: China's R & D spending increased from $11 billion in 2000 to $223 billion in 2016, or a compound annual growth rate of 19.4% over the past 16 years. China now has 5.4 million scientific and technological personnel engaged in research and development, making it the largest research talent pool in the world.
According to estimates by the American Industrial Research Institute (Industrial Research Institute), China's R & D spending will surpass that of the United States in 2026, while China's R & D spending has maintained double-digit growth over the past decade, while investment in the United States and other major industrial countries has almost stagnated.
Beijing, Shenzhen and Shanghai all account for nearly or more than 4 per cent of GDP, close to Israel (4.3 per cent) and South Korea (4.2 per cent), the world's top two R & D powers.
Shenzhen's patent declaration ranks first in China and second in the world, second only to Tokyo. According to the World intellectual property Organization (WIPO), the total number of patent applications in Shenzhen reached 69347 at the end of 2016, surpassing Silicon Valley's 59762. In China, nearly half of all patent applications come from Shenzhen, with 19000 in 2016 alone, accounting for 47 per cent of the country's total.
The acceleration of innovation in China is of great significance to investment. Although the high R & D investment rate does not necessarily produce excellent investment returns in the short term, it is still one of the key indicators to reveal the long-term advantages of enterprises. China's leading enterprises are more actively involved in R & D than their counterparts in Asia, indicating that the overall competitiveness of Chinese enterprises is improving and will play a leading role in global innovation in the future.
1. Clean economy-conversion from coal to gas is accelerating development in China.
1) China has entered the "golden age" of natural gas. Natural gas demand is expected to grow at an average annual compound rate of 15 per cent or more over the next three years, reaching 600 billion cubic meters by 2030, maintaining an average growth rate of 7-8 per cent in the next decade after 2020. Although China's natural gas demand has grown astonishingly in the past, natural gas still accounts for only about 6% of the primary energy structure, which is expected to reach 10% by 2020 and jump to 15% by 2030.
2) the conversion of coal to gas in rural areas brings huge room for growth. With the full development of "coal to gas" in cities, large-scale "coal to gas" in rural areas has also begun to start in an all-round way. The government aims to reduce pollution by 15% in the Beijing-Tianjin-Hebei region, where coal-burning pollutants account for more than 50% of the region's emissions. Therefore, "coal to gas" is very important to achieve this goal. From 2017 to 2019, the governments of these three places alone will provide 22 billion yuan in financial subsidies for the conversion of coal to gas.
3) to develop natural gas, China is investing heavily in infrastructure. First, the mileage of the gas pipeline is expected to increase from 64000 km in 2015 to 163000 km in 2025. Second, the receiving capacity of LNG import terminals will increase from 44 million tons in 2015 to 100 million tons in 2025. Third, the import volume of natural gas pipelines will increase from 72 billion cubic meters in 2015 to 150 billion cubic meters in 2025. With the construction of infrastructure, more people will benefit directly. In 2010, only 190 million urban residents used natural gas; in 2015, that number has increased to 290 million; by 2025, 550 million residents are expected to have access to natural gas.
2. "one-hour economic circle"-- A new form of urbanization
The 22 urban clusters supported by large-scale infrastructure and highway and railway networks, especially the high-speed rail construction network, covering 2Universe 3 of more than 800 cities, have become a new form of urbanization in China, attracting the in-depth transfer of physical industries from the coast to the interior, and promoting employment and income growth in third-and fourth-tier cities. When it comes to the investment trend of consumption upgrading, what we are concerned about is the vigorous trend of the so-called "small town youth" consumption upgrading trend in three or four unlimited cities.
China's middle class is growing rapidly and will become the largest middle class in the world in 2022.
From 2015 to 2020, China's consumer economy grew at a rate of 9 per cent, with the total consumer economy growing by 55 per cent to US $6.5 trillion, an increase of US $2.3 trillion, equivalent to a 1.3-fold increase over the current consumer market in Germany or the UK. this will ensure that China completes its transition to a consumption-and service-oriented economy. According to McKinsey, by 2022, more than 550 million people (or 76 per cent of the urban population) in China will join the middle class, making China half of the world's middle class population. The rise of the Chinese middle class will bring the best part of the world's largest consumption since the best part of post-war consumption in Europe and the United States in the 1950s. It is worth mentioning that the US stock market grew more than 87-fold during the best part of consumption between 1950 and 2007.
Chinese stocks are likely to enter a new bull market.
After talking about these profound structural changes, we will review the past and know the new and look forward to the future. Historical experience shows that the three necessary prerequisites for a bull market are crisis, long-term bear market and fundamental improvement. Over the past decade, we have witnessed a series of crises, including a large number of corporate failures, local government default on bad debts, the collapse of China's stock market, and so on. By the end of 2016, the bear market in fragrant stocks had been going on for 10 years. Excluding Tencent, who rose 40 times, the Hang Seng Index fell by an average of 2.0 per cent a year. The long bear market reflects the difficulties of China's economic transformation on the one hand and the lack of major institutional reforms on the other, in contrast to the determined reforms of the 1990s and 2000. There is no doubt that China's economy still faces many challenges. We believe that China has embarked on a major road of economic and social transformation, and some new positive developments and changes indicate that Chinese stocks are likely to enter a new round of bull market.
At present, the active management of China's capital market is booming, but quality funds are seriously scarce. The expression of China's capital market to China's real economy and growth is structurally unbalanced and inadequate. Since the private economy accounted for 67% of GDP in 2001, private and joint venture economies have created nearly 90% of GDP and nearly 100% employment growth in 2015, so accelerating the growth of private enterprise investment is very important to China's economic development. The unprecedented development and growth of China's private enterprises, creating more than half of China's GDP, means that the quality of economic development in the next decade is higher and more sustainable, and more importantly, private investment is more likely to create high-quality economic growth and high returns. The 6.5 per cent GDP growth overestimated the traditional economy dominated by the state-owned economy and underestimated the new economy with private enterprises as the main driving force.
In the MSCI China index, for example, GDP has risen 3.3-fold over the past decade, while the share of GDP in market capitalization has fallen from 85 per cent to 45 per cent. In terms of numbers in the index, the proportion of private enterprises in the index has only increased from 27% to 33%, while the median market capitalization of the top 20 private enterprises has increased sixfold, even if the growth of GDP has doubled, from US $3.8 billion to US $25.2 billion.
At the same time, after the difficult challenges of the real economy, there has been a significant increase in industrial concentration and a clear and healthy industrial structure in many industries. The leaders of private enterprises are rising in many industries, constantly gaining domestic and international market share, and continuously strengthening the long-term profit growth ability with competitive barriers. In this process, we see the continuous emergence of world-class companies in China's private economy.
While we are optimistic about China's economic transformation and upgrading driven by a knowledge-based economy, a clean economy and a consumer economy, investing in China is not easy. Of all the 96 China-or Greater China-themed mutual funds covered by the Morningstar Hong Kong website in 2017, only 7 per cent outperformed the index. Less than 50 per cent of Chinese active fund managers have outperformed the MSCI China index in the past decade, according to Morningstar Hong Kong. Although this performance is far better than that of US mutual funds (90 per cent did not outperform the index), the proportion of Chinese funds that outperform the index is declining year by year, falling to 33 per cent in the past five years, 20 per cent in the past three years and only 12 per cent in the past year.
In terms of economic and industrial fundamentals, China is the decisive force driving the world's marginal variables in almost every field, and the significantly inefficient market may be why active fund managers "understand China's investment world". The organic combination of deep insight into China's transformation and broad global investment vision, continue to explore high-quality stocks in an inefficient and volatile market like China, with a long-term vision. Comprehensive and in-depth fundamental research ability and low fund rate structure, take advantage of the root causes of market inefficiency to beat the index and obtain excellent returns.
Hong Kong / China has the potential to become the best investment market in the world in the next decade.
The Hong Kong stock market benefits from the dual confluence of Chinese capital outflows and international capital investment in high-quality Chinese stocks. Hong Kong / China has the potential to become the best investment market in the world in the next decade.
For a long time, international investors have seriously undermatched the stock markets of Hong Kong and China, as evidenced by the excellent performance of overseas mature markets (such as the United States) and emerging markets (such as India) over the past decade or two. In contrast, the Hong Kong stock market, excluding Tencent, which has grown 40 times over the past decade, is a decade-long bear market, with an annualized return of-2.0 per cent, which is almost a far cry from the US S & P 500 and India, where the average compound annualised return is 7.0 per cent and 6.3 per cent, respectively. Although the hang Seng index has risen 30% this year, it still trades at 14 times earnings, well below the historical average of other major markets and the hang Seng index. The inclusion of A-shares in the MSCI index starts the process of global investors increasing their allocation to China, and as Chinese stocks eventually account for more than 40 per cent of the MSCI emerging markets index, it will attract global capital to return to Hong Kong and China. With China's continuous capital market reform and economic opening up, global equity investors have only one choice-to increase the weight and allocation of the stock market in the Greater China region.
Brief introduction of the author:
Ms. Xu Ying is the co-founder and CEO of Fang Ying Research and Investment (Hong Kong) Co., Ltd. Founded in 2014, Fang Ying is an asset management company based in Hong Kong that invests in long-term stocks. Rooted in solid fundamental research and long-term investment concepts, Fang Ying focuses on exploring and investing in opportunities in the Greater China and global stock markets driven by China's transformation and growth. In the selection of the first overseas Fund Taurus Awards in 2017, Fang Ying was the only company in the long position category that won both private equity managers and fund managers.
Before founding Fang Ying, Ms. Xu worked as investment director of emerging market private equity fund of Capital Group (Capital Group), one of the largest active asset management companies in the world. Prior to joining Capital Group, Ms. Xu was a senior investment banker who worked for JPMorgan Chase & Co, Credit Suisse and Citigroup Inc. In her early years, she founded Citigroup Inc's Asian consumer goods, retail and healthcare investment banking business, and led a number of iconic cross-border M & A businesses. She has extensive experience in securities issuance and financial product design in international capital markets.
Ms. Xu is a member of Aspen Institute China leadership Organization. Ms. Xu holds a Bachelor of International Economics from Peking University, a Master of Economics from Ohio State University and an EMBA from China Europe International Business School.