Mary Nicola, investment strategist and Asia senior economist at Aviva Investors, told FSA on the sidelines of its alternatives event in Hong Kong today that the firm’s Multi-Strategy Capabilities Fund has no exposure to China fixed income or equities.
She cited the growing credit problem in the mainland as GDP growth slows.
“If potentially a company cannot refinance, and there are rising defaults, [credit] is a greater issue.”
However, while credit issues would put her off from mainland investments, she does not believe it will turn into systemic risk that could impact on economic growth.
Her team also thinks Chinese equities are too heavily exposed to the banking sector, “which will need to recapitalise at some point. It’s not a good story".
Chinese banks, which recently announced their half-year earnings, have raised investor concerns due to the value of bad loans on their books, which has increased.
Instead, she said Aviva's funds are shorting the Chinese renminbi, Singapore dollars and Aussie dollars because they are proxies for China’s economic slowdown.
Mitch Reznick, co-head of credit at Hermes Investment Management, said the firm's Multi-Strategy Credit Fund has no exposure to China credit, or more broadly to Asian emerging markets, due to valuation, draining liquidity, as well as limited supply of investable product in the hard currency space.
China’s offshore US dollar-denominated credit has a market capitalisation of roughly $250bn, totaling 155 issuers. About a quarter are issued by real estate companies, followed by the financial sector (22%) and quasi-government bonds (21%), according to a report from Axa Investment Management.
“There are a handful of hard currency big property names, but the liquidity is tight, and transparency on information is not aligned with what we are doing,” Reznick said.
For the past few years he has maintained zero exposure to Asian emerging markets and he expects no meaningful changes in the future.