Reyl Shows Chinese Equities, Bonds Some Love


Regulatory and property market news hasn”t cast China in a particularly flattering light, and equity valuations lag behind those in China. The Swiss private banking house has been adding exposures to the country’s bonds and stocks in its Asia-based portfolios run from Singapore.

Chinese equities and valuations have faced a run of adverse
developments. They now trade cheaply when set against their
Indian counterparts, suggesting that there is eventual potential
for China to catch up, private banking group Reyl says.

Rating agency downgrades to Evergrande and Kaisa, both property
groups (see
the Evergrande story here
), for non-payment of debt have
ignited fears that cracks are opening up in the world’s
second-biggest economy. The Chinese central bank has cut reserve
requirements on banks to ease monetary conditions. Earlier this
year, Beijing surprised global investors
by crackdowns
on sectors including technology and real

“China has been a huge issue keeping me busy this year,” Daryl
Liew, chief investment officer for Reyl in Singapore, said. “When
China started to shift its policy it was from a good base in its
economy. Last year China’s economy was recovering [from the
pandemic] very well.”

Valuations when compared with other Asian markets look
attractive, Liew said of China. Asked about the largest asset
allocation change Reyl made in the past few months, Liew replied
that within the Asian-biased portfolios which his team run from
Singapore, the firm has been adding China exposure, both on the
equity and bond side as valuations have “become quite

One ostensible reason for President Xi’s actions has been to
reduce big wealth inequalities – the past two or three decades
have seen the wealth gap rise, with a cohort of high net worth
and ultra-HNW Chinese individuals becoming a phenomenon in what
is, at least in theory, a Communist country. By early April 2020,
there were 389 Chinese billionaires, worth a total of $1.2
trillion. Their wealth had grown by almost 9 times, compared with
2 times for billionaires in the US, according to
PricewaterhouseCoopers and UBS in 2020. 

“There is a strong….agenda to address inequality and to address
significant companies from preventing smaller companies from
coming up,” Liew said. 

“The way they [Beijing] have gone about these changes has stung
the market and it is not something markets are used to.” (In the
West, there is usually consultation and trailing of proposed
changes, lobbying and debate before changes take place.) “There
has been a severe impact on the technology and property sector,”
he said. 

Asia ex-Japan has generally lagged wider developed markets this
year. The MSCI China Index is down by about 18 per cent this
year. The Hang Seng Tech Index has fallen sharply, down by 28 per
cent since January.

Much has been done already

“The good news is that most of the [Chinese] changes have been
made already….the technology sector seems to have stabilised.
Companies are changing their business processes,” Liew

The property sector is a concern. “We are still in the midst of a
crisis. The particular issue has been engineered by the
authorities. Government policy is leading…..to ensure developers
did not expand leverage. The authorities were concerned about
systemic risk,” he said. Government policy appears to have
shifted…the authorities seem to indicate they went too far and
may be rolling back reforms for a while. Already, mortgage
lending is up….in October, loans rose 43 per cent from a month
before. “It looks as if the spigots [of lending] opened up
slightly,” he said. 

Turning from China, Liew noted that India has been a “star
performer” in equity market terms. As investors shifted
portfolios away from China amid COVID and other factors, India
benefited, even though several months ago India was hit badly by

Corporate earnings are improving, having been an issue for a
while. India trades at a forward P/E of more than 20 times
earnings, about twice the price for equivalent China equities.
“Over the past year or so, Indian companies have surprised on the
upside. Earnings growth has materialised and firms are managing
costs. IT services and pharma have been very much in demand,”
Liew said.

A consideration for 2022 is whether India can maintain its
performance because there is a lot of “hype” about initial public
offerings in the country, Liew said. 


Japanese equities are cheap, trading about 15 times forward PEs
and attractive versus, say, the US, Liew said. And while
inflation bothers other countries, it might be a good thing for
Japan because the country has sought to reflate in the past few
decades of deflation, he said. 

Southeast Asia

Recent purchasing managers’ indices show above-50 level,
indicating recovery. The new variant of COVID might knock things
back a bit, however. The region has a wide dispersion of
vaccination rates and economic performance. “It appears
governments want to open up.”

Liew said that gold accounts for about 4 per cent in most
portfolios. Cash varies from about 3 to 8 per cent depending on
the risk profile of the account.

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