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China's Slice of This $48 Billion Fund Keeps Getting Bigger

  • UniSuper increases Asia equity allocation, buys U.S. banks
  • Profit growth in emerging markets is key driver for UniSuper

John Pearce has returned to Sydney from a week in Hong Kong beaming, with one clear message of where to invest his next dollar: China.

The chief investment officer who’s in charge of A$60 billion ($48 billion) at Australian pension fund UniSuper Management Pty expects returns in Asian emerging-market equities to beat developed economy peers, extending an outperformance that’s already underway. The main reason: Chinese firms are driving profit growth set to exceed that in mature stock markets as it’s coming from a lower starting point.

UniSuper is joining some of the world’s largest investors who say the two-year rally in emerging-market assets has further to go. Franklin Templeton to BlackRock Inc. are among money managers betting that developing-nation stocks and bonds will continue to appreciate as they catch up from more than half-a-decade of underperforming U.S. assets.

Pimco, BlackRock See Multi-Year Rally as Emerging Markets Rev Up

China’s management of its economy is also making Pearce more comfortable. He recently allowed his money managers to invest in mainland Chinese equities directly for the first time in the firm’s history.

Some 2,300 Communist party delegates gather next month in a twice-a-decade meeting that will provide President Xi Jinping with his biggest opportunity to reshuffle scores of top government positions. Pearce questioned the stance taken by some banks advising caution before the conclave.

“It’s a red herring,” Pearce said in an interview in Sydney on Friday. “Everyone doubted President Xi Jinping’s willingness to look at structural reform before this party congress, but he’s been doing it. He’s already well on the way.”

Risks Flagged

China bears have been under pressure this year as better-than-forecast data and an appreciating currency showed the economy is weathering the authorities’ deleveraging campaign. Still, last week’s credit-rating downgrade by S&P Global Ratings reinforced an argument endorsed by hedge-fund titans Kyle Bass and Jim Chanos: The risks to financial stability and the economy from strong credit growth are mounting.

Hayman Capital Management’s Bass, among the most outspoken China bears, said losses in the country’s banks could be four times bigger than those suffered by American lenders during the global financial crisis.

Earnings on the MSCI Emerging Markets Asia Index over the next 12 months will grow an average 21 percent, compared with 13 percent on the MSCI Asia Pacific Index, according to the consensus of analyst forecasts compiled by Bloomberg.

“If you look at the Asian corporate scene, you’re seeing companies and their earnings -- their margins -- coming off trough-type levels,” said Pearce, whose fund members include current and former Australian university staff. “If you look at the U.S. markets, you’re seeing margins are coming off peak sort-of levels. The U.S. is in great shape, but it’s just a case of the starting points.”

Here’s a snapshot of his other investment views as they pertain to the fund’s high-growth strategy, that typically takes more risk than its balanced portfolio: 

  • Expects gradual tightening of U.S. monetary policy to favor banks; increased weighting in UniSuper’s high-growth fund option from 1.2 percent in December 2015 to 4.1 percent in June 2017
  • Continues to trim weighting of Australia equities, now down to 31 percent; has sold entire Australian equity-income shares position, or equities targeted more at yield rather than capital appreciation, since end of 2015
  • Information technology and biotechnology sector exposure lifted to 9.4 percent from 6 percent at end of 2015
  • European equities allocation increased to 1.6 percent from zero at the end of 2015
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