JPMorgan Chinese Investment Trust plc: Annual General Meeting January 2019 Howard Wang , Managing Director Portfolio Manager and Head of the Greater China Equities Team Rebecca Jiang , Executive Director Portfolio Manager
Questions from investors What’s your view on US -China trade? Several sectors have sold off quite sharply this year.. what is going on? Given all that has happened, what have you done with the portfolio? What are some of the interesting new ideas for the portfolio this year? 1
Outlook Secular corporate earnings growth in “New China”, widening foreign access and Opportunities? attention to A-share market, and attractive valuation driven by extreme market sentiment Drivers of returns? Corporate earnings growth coupled with valuation normalization Escalation of global trade tensions, growth headwinds from domestic financial Risks? deleveraging, and policy over-tightening Key stock overweights remain in structural growth sectors, including consumer, Positioning? technology / internet, healthcare and environmental services Source: J.P. Morgan Asset Management. As of December 2018. Opinions, estimates, forecasts, projections and statements of financial market trends are based on market conditions at the date of the publication, constitute our judgment and are subject to change without notice. There can be no guarantee they will be met. 2
Trade wars: It’s a systematic approach Where China makes concessions: Old China What China has on hand: things beyond tariffs Opening up market access Auto, financial services USD Billions, 2017* $600 Auto & auto parts, consumer Sales* Lowering import tariff products (cosmetics, perfumes, spirits etc.) Likely next $500 Services target for Increasing imports Oil & LNG, agricultural products China $400 Sales* Where China holds the line: New China $300 Could be Software, automation, healthcare Made in China 2025 targeted Goods services $200 Services “ Just had a long and very good call $150 billion level with President Xi of China. Deal is $100 Currently moving along very well. If made, it will Goods targeted with be very comprehensive, covering all tariffs subjects, areas and points of dispute. $0 Big Progress being made!” U.S. China - President Trump via Twitter on Source: Market Insights – Market Bulletin: Investors eye the negotiating table: Rebalancing Dec 30, 2018. China-U.S. trade and markets. U.S. Bureau of Economic Analysis, U.S. Census Bureau, J.P. Image source: Shutterstock. Morgan Asset Management. *Sales data is as of 2015, which is the most recent year for which sales of multinational firms are available. Data reflect most recently available as of 10/5/18. 3
Monetary policy focus changed from deleveraging to stabilizing leverage Short term rates declined rapidly with more liquidity injection from Credit growth has bottomed PBOC 6 Domestic Credit YoY growth 5.5 5 30% A 4.5 4 C F 3.5 B D 25% 3 G E 2.5 Shibor (3M) China Corp Bond AA (1Yr) 2 20% People’s Bank of China (PBOC) cut Reserve Requirement Ratio (RRR) by A 6/24 50bp 15% PBOC will offer Medium-term Lending Facility (MLF) liquidity to banks B 7/18 specifically to buy low grade corp bonds Eased Wealth Management Product (WMP) rule is announced from C 7/20 PBOC/China Banking and Insurance Regulatory Commission (CBRIC) 10% with more flexibility given to banks PBOC to cut Reserve Requirement Ratio (RRR) by 100bps D 10/7 E 10/30 CBIRC urges banks to support SMEs and private sector 5% PBOC to offer banks Targeted Medium-term Lending Facility (TMLF) to F 12/19 01/13 04/13 07/13 10/13 01/14 04/14 07/14 10/14 01/15 04/15 07/15 10/15 01/16 04/16 07/16 10/16 01/17 04/17 07/17 10/17 01/18 04/18 07/18 10/18 support SMEs lending G 2019/1/4 PBOC to cut Reserve Requirement Ratio (RRR) by 100bps Source: WIND. Data as of end Dec 2018. Source: Bloomberg, J.P. Morgan Asset Management. As of December 31 2018 4
More proactive fiscal policies Pick up in local government bond issuance to support Fiscal policy to reverse infrastructure investment Expect 25% Government 3500 Government government revenue growth Net increase of special-purpose local expenditure expenditure is faster than government bond growth is faster to outgrow government than revenue 3000 revenue Net increase of local government bond expenditure 20% growth growth 2500 15% 2000 Rmb bn 10% 1500 1. Personal income tax cut 5% (0.5 % of GDP)” 1000 – 20 Oct 2018 2. Corporate VAT cut expected in 2019 500 0% 03/16 05/16 07/16 09/16 11/16 01/17 03/17 05/17 07/17 09/17 11/17 01/18 03/18 05/18 07/18 09/18 11/18 0 Government revenue growth Government expenditure growth 2016 2017 2018 2019E Source: WIND. Data as of end Dec 2018. Source: WIND, Ministry of Finance, CICC Estimates. Data as of end Dec 2018. 5
More coordinated policies to support confidence and growth Property: Relaxation of mortgage and in selective cities Stock market: Rolling 3M sales volume growth 50% 700 Tier 1 40% Tier 2 Tier 3 650 • 19 Oct - Coordinated effort 30% to resolve pledged stock 20% issue 600 • Promote onshore equity 10% market financing via pro- market reforms 550 0% -10% 500 -20% -30% 450 -40% Avg. 3M16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Avg. 3M17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Avg. 3M18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 400 On November 1, 2018 Xi gave major speech on the importance of private sectors and entrepreneurs in the economy… Source: Data as of end Dec 2018.Data as of end Dec 2018. Rolling 3M = Rolling 3 months. Source: Bloomberg, J.P. Morgan Asset Management. As of December 31 2018 6
Sector level tinkering denting confidence Healthcare examples – Jiangsu Hengrui / Sino Biopharm Tech example - Tencent YTD stock price performance YTD stock price performance 500 SinoBiopharm (LHS) 16 85 Vaccine scandal 450 80 Hengrui (RHS) 14 CFDA reshuffle Planned measures 75 12 to reduce the prevalence 400 of myopia 70 10 Start of game 65 350 approval suspension 8 60 6 300 2Q18 results 55 Centralized procurement 4 50 250 2 45 200 0 40 01/18 02/18 03/18 04/18 05/18 06/18 07/18 08/18 09/18 10/18 11/18 12/18 01/18 02/18 03/18 04/18 05/18 06/18 07/18 08/18 09/18 10/18 11/18 12/18 …Perception that government favors SOEs over the Private Sector prevails … Source: Bloomberg, J.P. Morgan Asset Management. As of 31 Dec 2018. The securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell. Past performance is not a reliable indicator of current and future results. 7
Sector level tinkering denting confidence Education examples – Wisdom / New Oriental Combined macro and micro level pressures punishing 4500 6.2 YTD stock price performance CSI300 (LHS) 6.3 USD / CNY ( RHS - Inverted) Revised Draft of the 8 110 6.4 4000 China Private Education Promotion Law 7 100 6.5 6 6.6 90 3500 Regulations for 5 6.7 after-school tutoring 80 4 6.8 70 3 3000 Wisdom Education (LHS) 6.9 60 2 New Oriental (RHS) 7 50 1 2500 7.1 0 40 01/18 03/18 05/18 07/18 09/18 11/18 …Perception that government favors SOEs over the Private Sector prevails … Source: Bloomberg, J.P. Morgan Asset Management. As of 31 Dec 2018. The securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell. Past performance is not a reliable indicator of current and future results. 8
What have we done? • The selloff of the market has opened up certain opportunities • We have initiated and added to companies with high expected returns post the market panics and the ones continue to execute and whose normalised earnings are unlikely to see any change Select additions Select reductions Software / Internet: Structural Growth with Electronics/tech: attractive expected return End demand weakness • Trade-related uncertainties • Consumer cyclicals: Real estate Growth Staples: Steady earnings growth Source: J.P. Morgan Asset Management. Opinions, estimates, forecasts, projections and statements of financial market trends are based on market conditions at the date of the publication, constitute our judgment and are subject to change without notice. There can be no guarantee they will be met. 9
Going forward… Growth has underperformed Value… … and onshore underperformed offshore 120 120 110 110 100 100 90 90 MSCI China MSCI China MSCI China Growth 80 MSCI China Value CSI300 80 70 70 • Our base case remains: Controlled China growth moderation • Interest from foreign investors in the domestic market remains strong • Valuations are also fairly supportive • We maintain a long-term view and remain focused on structural opportunities in the consumer , technology , and healthcare sectors Source: J.P. Morgan Asset Management. As of 31 Dec 2018. Opinions, estimates, forecasts, projections and statements of financial market trends are based on market conditions at the date of the publication, constitute our judgment and are subject to change without notice. There can be no guarantee they will be met. Past performance is not a reliable indicator of current and future results. 10
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