Many global brokerage firms and research houses have seemingly played it safe by taking a cautiously negative view on China and global growth, but Morgan Stanley has taken a different stance.
Bill Greene, the Hong Kong–based head of Asia research at investment bank Morgan Stanley, explains that he and his team have an “out-of-consensus view” on both China and the strength of global growth.
“On China we have been arguing that the current tightening cycle will not cause a sharp slowdown and that policymakers will be able to rein in financial stability risks,” he says. “On the global growth outlook, we have been highlighting that this is the first synchronous recovery in both developed markets and emerging markets since 2010, and that the strong global recovery will support healthy growth in global trade and Asia’s exports.”
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Greene adds that many of his buy-side clients are coming to him with a wide range of views and that he and his team often engage in robust exchanges with them. The Morgan Stanley pros must have been highly persuasive, assuaging the fears of many of their buy-side clients — chief among them hedge fund managers who typically have a negative outlook on China. When Institutional Investor’s Alpha recalculated the results of this year’s All-Asia Research Team survey of the region’s best equity analysts using only the votes cast by hedge fund participants, Morgan Stanley was the undisputed champion, winning 35 team positions, 25 of them first place. Bank of America Merrill Lynch ranks second, with 31 team positions, four of them first place, followed by Credit Suisse and UBS, with 27 team positions each. The top three firms all repeat their rankings from the previous year. Rounding out the top five in this year’s survey, with 23 team positions, is Deutsche Bank.
Anil Agarwal, who covers Asian banks for Morgan Stanley and is based in Hong Kong, was voted the No. 1 banking analyst by hedge fund professionals. He remains bullish on the banking sector despite increasing concern on Wall Street about rising risks in Asian financials.
Agarwal points to the region’s continuously strong growth rates, advising his buy-side clients that they must factor in growth when reviewing the banking sector.
“We have been very bullish on Asian banks — primarily in North Asia — driven by the view that nominal growth across economies is picking up, which should help bank profitability improve,” says Agarwal, adding that North Asian banks, particularly those in South Korea, Hong Kong, and China, are still trading at very attractive multiples. He thinks the dynamics of improving profitability and lower multiples will continue despite strong performance across the banking sector. “As profitability improves and cost of equity reduces, the stocks should do well,” he says. “These banks have been very strong performers over the last 12 months, and this call has been appreciated by investors.”
Agarwal tells his buy-side clients not to worry about China — at least not for the coming year.
“We expect investors’ risk perception toward North Asia — especially China — to reduce, and we believe that orderly containment of financial system risks on the mainland will help stocks continue their rerating.”
Despite growing wariness among some hedge fund managers of rising risk in China, they continue to see bright spots in the nation’s consumption story. Hedge funds chose Bank of America Merrill Lynch’s Young-Ah Han and Chen Luo, who co-head the bank’s Asian consumer discretionary coverage, as their favorite analysts covering that sector.
Young says her top stock pick in the past 12 months was home appliance maker Midea Group Co., which rose 40 percent this year through August 4, to 39.45 yuan a share. Young notes that Midea, which had sales of $23 billion in 2016, is the world’s largest white-goods company.
“We believe Midea could not only benefit from the end of air-con destocking in China, but also ride on the structural trend of consumers trading up and on industry consolidation,” Young notes, adding that the company offers its top management an attractive incentive scheme and is well positioned to take advantage of rising demand among Chinese consumers for home appliances. In addition, she points to Midea’s $5 billion acquisition last year of Frankfurt, Germany–based Kuka AG, the world’s fourth-largest robotics manufacturer, positioning the Chinese appliance group for years of growth ahead.
Young’s colleague Chen cautions that investors should note that China’s consumption growth will slow in the coming 12 months and that they need to adjust their strategies. “Consumer discretionary is normally a late-cycle sector,” Chen says. “The past credit easing and property boom have positively contributed to the sector’s recovery. However, the recent slowdown in credit expansion and property tightening might lead to slower consumption growth at a later stage.”
Some on Wall Street have also expressed caution about slowing growth in China’s automobile market. Jack (Yuhin) Yeung, head of Morgan Stanley’s autos and auto parts coverage, is telling the buy side not to worry. Yeung, who was voted the No. 1 auto analyst by hedge fund managers, points to strong demand among Chinese consumers for high-end, luxury automobiles.
Specifically, Yeung notes that his positive call on Hong Kong–listed Brilliance China Automotive Holdings has proved to be right. The company’s shares have risen 94 percent, to HK$20.75 a share, for the year through August 4, and 143 percent over the past year, buoyed by rising sales in Brilliance’s BMW joint venture production facility. In the coming 12 months, Yeung says, he is advising the buy side to invest in Chinese automakers that produce mid- to high-end SUVs — chief among them Guangzhou Automobile Group Co., which is trading at HK$15.4 a share, up 64 percent on the year through August 4; and Shanghai-listed SAIC Motor Corp., which is trading at 29.3 yuan a share, up 25 percent on the year through August 4.
Whether markets are up or down, the hedge fund managers who do their own research, as well as track the research of top global firms, will be the the most likely to come out ahead, says Morgan Stanley’s Greene: “Those clients which are best positioned and able to navigate through the cycles and deliver the best long-term service to their asset owners have and should continue to prosper and grow.”
