John Pearce has returned to Sydney from a week in Hong Kong beaming, with one clear message of where to invest his next dollar: the Chinese mainland.
The chief investment officer who is 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 is already underway.
The main reason: Chinese firms are driving profit growth set to exceed that in mature stock markets as it is 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 US assets.
China's management of its economy is also making Pearce more comfortable. He recently allowed his money managers to invest in Chinese mainland equities directly for the first time in the firm's history.
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.
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.
But leading economists and financial experts said S&P's moves lacked credibility and neglected the reality of the nation's financing structure and the overall quality of the country's banking industry.
"S&P Global Ratings' decision focused only on China's leverage level but overlooked the possibilities of risk control in a different financing structure," says Pan Guangwei, executive vice-president of the China Banking Association.
China's leverage level has been on the rise for some time, said Pan, but it is too simplistic to directly compare it with other countries.
"China has an indirect financing-oriented financial system, and banking loans play a leading role in social funding," said Pan.
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.
Researchers said innovations and creativity boom observed in the China market, particularly in fields of artificial intelligence or AI and financial technologies or fintech may lead investors to reset their focus, shifting from concerns over credit quality to interest in emerging growth drivers.
According to a note by the research team of UBS Investment Banking, increasing number of Chinese AI and fintech firms are world class.
Besides, higher resource allocation for education has helped produce 2.8 million graduates majoring in science and technology－five times that of the US.
Rising investment in research and development and government policy support are also boosting innovation in China.
As investors plug into the situation, valuations of Chinese equities that are not already popular have room to rise, particularly those of internet companies, the research paper said.
