BlackRock gives Chinese A-shares a miss

For BlackRock's multi-asset income funds, Mr Fredericks now finds equities in Europe more appealing than those in Asia, in terms of both risk and return.
For BlackRock's multi-asset income funds, Mr Fredericks now finds equities in Europe more appealing than those in Asia, in terms of both risk and return.PHOTO: DIOS VINCOY JR FOR THE SUNDAY TIMES

Asset management powerhouse BlackRock prefers European shares to Asian stocks for its multi-asset income funds - which has shielded it from the crash in China.

BlackRock managing director Michael Fredericks told The Sunday Times recently that regional

equities are not very appealing at the moment in terms of risk or income generation.

"If you need to find income-producing securities, it'll be somewhat of a challenge in the Asian equity markets compared with the United States and Europe. Even yields in Japan, which we prefer in Asia, are not terribly high," he said.

"As for China, we've been very cautious because of our dual mandate to deliver income but also focus on risks. For income-generating purposes, I couldn't possibly put Chinese A-shares into my funds. It's fine that we missed the bull run - we're not interested."

CHINESE MARKET DOMINATED BY RETAIL INVESTORS

The fact that retail investors were dominating the flows is worrying to us, because they tend to chase momentum. In many cases, they don't ask the right questions, and simply want in when the market is up. That leads to herd mentality. Now, nobody knows when the market will hit bottom.

BLACKROCK MANAGING DIRECTOR MICHAEL FREDERICKS, on China

That caution seems well justified, given developments in the the past four weeks. The Shanghai Composite Index has dropped more than 26 per cent since June 12. The plunge followed a 150 per cent surge in the preceding 12 months.

This intense roller-coaster ride did not come as a surprise to BlackRock, said Mr Fredericks, who heads the company's retail asset allocation in the US and oversees its global multi-asset income funds.

"Looking at the high concentration of retail investors in China and the high valuations there, we've always felt that it would be vulnerable to a big sell-off.

"The fact that retail investors were dominating the flows is worrying to us, because they tend to chase momentum. In many cases, they don't ask the right questions, and simply want in when the market is up. That leads to herd mentality. Now, nobody knows when the market will hit bottom."

He finds European equities appealing, despite uncertainties surrounding a regional spillover from the Greek debt crisis.

He said that, in the short run, the crisis would result in considerable volatility for European stocks.

However, he said: "I really don't think that whether Greece will exit the euro zone will have any bearing on the earnings of, for instance, Daimler or LVMH."

He noted: "Some of the world's most competitive companies and household brands are based in Europe, but they are not overly exposed to European demand.

"Our approach will be to look through the short-term noise. If you liked those companies three months ago, then you have the opportunity now to buy into high-quality firms whose shares are trading at a discount but that have no issue maintaining their earning power."

Reflecting that observation, the price-earnings ratio of the FTSEurofirst 300 index, which tracks Europe's 300 largest stocks, should come in at 16.63 per cent this year, estimates Bloomberg.

This would be lower than the 18.47 per cent seen in 2013 and the 20.04 per cent reached last year, despite a substantial pricing build-up this year before April, when volatility set in amid concerns over Greece.

For its multi-asset income funds, BlackRock favours a portfolio mix where stocks make up roughly 30 per cent and fixed income about 60 per cent.

Over in the fixed income segment, alternative sources of returns are worth a closer look now, Mr Fredericks noted.

"Segments like high-yield bonds have been beneficiaries of low interest rates, and they're still attractive in Asia, but in the US and Europe, there's not a lot of return left now," he said. "One of our key messages now is to diversify more, and move to less well-known asset classes."

"Some of the best ideas are in specialised markets, for instance owning debt in commercial real estates and even mortgages in the US," he added, referring to exposure to US mortgage-backed securities, which only a handful of global asset managers offer in Singapore.

The US housing market is actually one of the bright spots of economic recovery, he said, with home prices up over 10 per cent in the past year.

A version of this article appeared in the print edition of The Sunday Times on July 19, 2015, with the headline 'BlackRock gives Chinese A-shares a miss'. Print Edition | Subscribe