Milltrust Keywise China Fund

Fang Zheng, Portfolio Manager for the Milltrust Keywise China (UCITS) Fund, and CIO and Founder of Keywise Capital, shares his outlook for the Chinese markets and the key reasons to be invested in China:

Key growth drivers

Attractive Valuations

MSCI China has 12m forward PE of 9.6X and PB of 1.3X, both near historical low

1. Valuations

Structural Opportunities in the NEW Economy

– The new economy sectors have been outperforming the old economy sectors since 2010 amid China’s economic restructuring.
– The new economy still has a long way to go

2. Structural Opportunities NEw Eco

Positive catalysts in economic reforms

  • The implementation of the reforms will generate structural Alpha opportunities as well as enhance the efficiency of the overall economy, i.e. bring Beta opportunities
  • Systematic reforms related to De-regulation, De-emphasizing SOEs and Respect of the law by the current Chinese government
    • De-regulation in government administration
    • Change of the demographic policy (one-child policy)
    • Development of a social safety net
    • Fiscal and taxation reforms
    • Reduce SOE monopoly and promote competition
    • Removal of entry barriers to the service industry
    • Liberalization of the healthcare industry
    • Liberalization of pricing controls (especially resource prices)
    • Liberalization of the financial service industry (interest reforms)
    • Free trade zones and multilateral trade/investment negotiations
    • Opening of the capital account
    • Legal reforms
    • Anti-corruption campaigns

Healthcare – sustainable growth on the back of multiple drivers

  • Healthcare spending will have 15% CGAR in the next decade driven by four  factors: aging population and growing disease burden, emerging middle class, significant expansion of insurance coverage, and improvement of medical infrastructures

3. HC

Domestic consumption – ride on the rising urbanization rate

  • Consumption rate starts to rise rapidly as urbanization rate passed 50% and the population aged

4. Consumption

Domestic consumption – E-commerce is changing the landscape

  • The consumption behavior is undergoing a structural change. Both online total transaction volume and shopping penetration rate have been rising rapidly.

5. E Commerce

Information Technology – Increasing Mobile Penetration

  • Smartphone penetration is still low in emerging markets, which implies strong growth potential for Chinese phone makers such as Lenovo, Xiaomi and Huawei, and multiple players on the value chain.

6. IT

Service industry – Under-developed and will see a much faster growth

  • China’s service industry especially non-bank financial institutions will see much faster growth for the economy to get on a more sustainable path

7. Service Industry

Environmental Protection – towards a Cleaner Country

  • China environmental related investment as a % of GDP could continue to increase

8. Environment

Huge market with tremendous opportunities

9 Investment Universe

Key risk factors.

  • Economic indicators showed softening yet stable signs in May.
    • Industrial production (IP) growth was unchanged at 6.0% y-o-y, while fixed asset investment (FAI) growth slowed to 9.6% y-o-y (ytd) from 10.5% in April.
    • The official PMI remained at 50.1
    • Nominal retail sales growth edged lower to 10% yoy (from 10.1% in April)
    • Credit expansion slowed with aggregate finance came in at RMB659.9bn for the month (vs. RMB751bn in April and RMB2.3trn in March).
    • Export growth in USD terms declined further to -4.1% yoy from -1.8% in April. Import growth in USD terms rose to -0.4% yoy from -10.9%.
    • May CPI inflation moderated to 2.0% from 2.3% yoy in April, and PPI deflation eased to -2.8% from -3.4% in April)
  • The weaker data reaffirmed our view that the debt-fueled rebound in investment growth in March was a short-lived policy mistake. In early May, the official People’s Daily published an article by an “authoritative” person indicating that China should not support growth by adding leverage. With that, we believe future policy easing may be more cautious and that the government may try to speed up the pace of supply-side reform.
  • In its 2016 Market Classification report, MSCI put off the inclusion of China’s A-share market in its influential Emerging Markets Index. It credited improvement in the accessibility of the China A shares market for global investors, and said investors recognized action taken to further open the China A shares market.  MSCI will retain the China inclusion proposal for the 2017 review and doesn’t rule out a potential off-cycle announcement ahead of it. While the announcement was disappointing, we think this is just a small set-back and the impact to the market is short term. We continue to believe more integrated Chinese markets and the expected Shenzhen-Hong Kong stock connect to be announced this year.


  • The fund gains its exposures through bottom up fundamental research. In line with our views of the March market rally, our fund performance has been relatively weak compared to the market for a temporary basis, the main reason was the rebound of the cyclical momentum. However, those names were not in our portfolio as we remained structurally cautions on those cyclical names which has proven right after the weak data released in May. We are sticking on our bottom up investment approach and continue to believe fundamental reforms are necessary to put the Chinese economy on a solid foundation and a sustainable growth. We are comfortable with our current positions and will pay close attention on any adjustments needed. The fund has a bias towards new economy companies in line with the country’s transitioning economy.

Forecasted return for each investment over the next 12 months (in USD). 

We think the return for the portfolio will be positive 10-20% in the next 12 months.

Potential downside over the next 12 months (in USD).  The portfolio downside over the next 12months is estimated to be negative 5-10%.

June 2016