Insight on Mandatory Provident Fund – September 2018

Risk appetite remained low in August due to a number of softer than expected data and the ongoing US-China trade tensions. The latest round of trade talks between Washington and Beijing ended without any breakthroughs and continues to cast a shadow over the market. Both countries slapped tariffs on US$16 billion worth of goods on each other in August, following levies of US$34 billion each the month before. All eyes will now be on when and how US President Donald Trump decides to push ahead with his plan to impose tariffs on another US$200 billion worth of Chinese goods.

With the saga showing little signs of losing steam, the Chinese authorities have maintained a nimble approach in terms of policies in order to cushion against potential market risks. This flexibility was shown by the PBoC’s decision to inject more liquidity to the short-term funds market by resuming reverse-repo operations on 16 August1, before putting thing on hold a little less than a week later in response to changing market conditions.

In addition, the RMB’s correction over the past two months (losing over 5% on a trade-weighted basis) prompted the PBoC to re-introduce its “counter-cyclical” measure2, which debuted in May 2017 and subsequently removed in January 2018. This reflects the authorities’ strong policy commitment to support a stable RMB. It also reinforces the portfolio manager’s view that the scale of any further easing or stimulus measures will be heavily data-dependent and designed to maintain financial stability rather than drive economic growth. Consequently, the portfolio manager does not expect a significant loosening in policies at this stage barring any unexpected volatility-inducing events.

We harbour a conservative view towards the Hong Kong and China market over the short term. Consequently, we will maintain a reasonable level of cash in our MPF portfolios. Meanwhile, weighting in the insurance sector has also slightly increased as premium sales may gradually improve in 2H2018 following policy changes the year before.

Recent market corrections have priced in the pessimism generated by the US-China trade tension as well as the slowing China economy, leaving the latest round of earnings unappreciated. For 2Q2018, the China market led in terms of the Asia ex Japan region’s earnings growth and the consensus 2018 estimated EPS growth stands at 15.5%.  Although the earnings momentum could moderate in the second half of the year, the market valuation is undemanding with 12-month forward P/E trading at 11.2x.


1&2. Source: The People’s Bank of China

The views expressed are the views of Value Partners Limited only and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.