UBS-中国公募资金流向

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GlobalResearchandEvidenceLab

12August2024

ChinaEquityStrategy

Mutualfundpurchasesandredemptions:Reasons,flowandoutlook

ActiveMFscontainedbypastperformance;passivefundunitsincreased

Recentmutualfund(MF)redemptionsandtheirimpactontheA-sharemarkethavedrawninvestors'attention.Inouranalysis,wedivideMFsintoactivefunds(includingflexible,equity-orientedhybridandcommonstockfunds)andpassivefunds(includingindexfunds,exceptETFfeederandenhancedindexfunds).1)Activefundshaddecreasesof136.7bnunitsinQ124(thelargestquarterlyfallinthepastdecade,exceptforQ315)and56.8bnunitsinQ224.Historically,activeMFs'returnshaveservedasaleadingindicatoroffund-raisingperformance.AmidanoverallA-sharemarketdownturninthepasttwo-plusyears,equity/hybridMFshavecorrected36%/28%sinceearly2022.Money-losinginvestorsmaybereluctanttobuymorefundproductsoreventoredeemtheirunits.2)Passivefundspostedanincreaseof207.7bnunitsinH124.ParticularlyinQ124,theirAUMexpandedasharpRmb311.3bn,thelargestquarterlygainintheirhistory.Importantly,thesubstantialpassivefundAUMexpansionmainlyreflectedinvestorpursuitofbroad-basedETFs,especiallythosetrackinglarge-capbluechips.YTD,theCSI300IndexEFThasreceivednetinflowofRmb400bn,whilesector,themeandstyleETFshavehadnetoutflowoverall.

EquityStrategy

China

LeiMeng

StrategistS1460517080001 lei.meng@+86-21-38668939

YuSheng

AssociateS1460122070004yu.sheng@+86-21-38664873

RobinXu

AnalystS1460511010012 bin.xu@+86-21-38668872

Wherecouldredemption-associatedmoneygo?

Capitalflowisintricateandhardtotrack.Afterredeemingtheirunits,MFinvestorsarewidelyperceivedtothen:1)payoffmortgagesearly;2)savingup;3)buylow-riskmoneymarketordebtfunds;or4)buyinsuranceproducts.Householdsarebuildingprecautionarysavingsandlow-riskfinancialinvestmentstoaddressuncertainty;inotherwords,theirriskappetiteislownow.

Whenwillredemptionstopurchasesrebalance?

Inourview,catalystsforaresumptionofactiveMFpurchasesmayinclude:1)arisingstockmarket,whichwoulddriveupreturnsforfundinvestors;2)afurtherdeclineinmortgagerates;3)adropindepositratesorwealthmanagementproductyields;and4)higherlong-termshareholderreturnsasaresultofthepromotionofan"investor-oriented"A-sharemarket.

Equitystrategy:Limiteddownside;constructiveonvalueandlarge-capstyles

WeviewA-sharedownsideriskasmanageable,given:1)thegovernment'scommitmenttosafeguardcapitalmarkets;2)asharprecentriseinthetradingamountofETFsthattrackkeyindexesdespitemarketdownturns;and3)excessivepessimismsuggestedbyanelevatedequityriskpremium.Intermsofstyle-basedallocation,weexpect"value"tooutperform"growth"inH224,giventhelackofnewcapitalintheA-sharemarketcurrently,aswellasMFs'positionsinvaluestocks,whichremainfarfromcrowded.Long-terminvestorsmayconsider"buyingthedip"onselecthigh-qualitygrowthstocks.Largecapsmaycontinuetooutperformthebroadermarket,asinsurerspreferlargecapswithstableearnings,whilesmallcapsmaycontinuetofacesnetoutflowsfromthequantfunds.Amongsectors,wearetacticallyinclinedtowardthosewithsolidearningsgrowthand"policydividends"andcautiousonthosesubjecttoslowingexportdemand.Specifically,weareoverweightelectronics,utilities,energyandtelecom.

ThisreporthasbeenpreparedbyUBSSecuritiesCo.Limited.ThisisatranslationofaChineseresearchnotepublishedbyUBSSecuritiesCoLtdonthesamedate.ANALYSTCERTIFICATIONANDREQUIREDDISCLOSURES,includinginformationontheQuantitativeResearchReviewpublishedbyUBS,beginonpage9.UBSdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.

ChinaEquityStrategyUBS-SResearch

ChinaEquityStrategy12August2024abc2

DecodingMFredemptions

Notably,MFs'returnstendtobealeadingindicatoroftheirfund-raisingperformance.IfanMFhascorrectedforthepast12months,itsmoney-losinginvestorsmaybereluctanttoputmoremoneyintotheproductoreventoredeemtheirunits.However,whenthemarketrecoversandMFspoststrongreturns,investorsnaturallyraiseequitypositions,usuallyaccompaniedbyarushtowardMFs,inturndrivingthemarketupfurther.In2019-21,MFs'pursuitofqualityindustryleadersledthosestockstoriseandtocompellingMFperformance,makingnewfundproductsdesirable.Forexample,in2019-21,theWindConsumerStaplesIndustryIndexjumped166%,whileatotalof4.4trnunitsofstockandhybridMFswereissuedduringthethreeyears.

Inthepasttwo-plusyears,theA-sharemarkethasdeclinedoverall,withtheWindAllA-shareIndex/CSI300Indexdown31%/33%sinceearly2022.Duringthisperiod,stock/hybridMFscorrected36%/28%,leavingMFinvestorswithlosses.ThatexplainstheweaknewfundissuanceandsignificantMFredemptionsYTD,inourview.Particularly,MFredemptionsareriskingfurthernetoutflowfromtheA-sharemarket.

Activefundscontainedbypastsubduedperformanceamidsluggishstockmarket

Inouranalysisofthedynamicsabove,wedivideMFsintoactivefunds(includingflexible,equity-orientedhybridandcommonstockfunds)andpassivefunds(includingindexfunds,exceptETFfeederandenhancedindexfunds).Wefindthetwocategorieshaveperformeddivergentlythisyear.

Activefundshavebeenunderredemptionpressureduetothesluggishstockmarket,whichhasincreasedthemarketpullback,creatinganegativefeedbackloop.SuchfundshaveshranksharplythisyearintermsofunitsandAUM.Specifically,thereweredecreasesof136.7bn/56.8bnunitsinQ124/Q224,withtheQ124decreasethelargestquarterlyoneinthepastdecade,exceptforQ315.

MeasuredbyAUM,activefundshaddecreasesofRmb252.7bn/Rmb133.1bninQ124/Q224.Whileitwascausedbydecreasingunits,tosomeextent,theAUMcontractioninQ124-Q224wasbelowthehistoricalhigh.Inourview,thisrelativelymanageablecontractionreflectedalimiteddropinstocks,overweightedbyactivefundsYTD,asthereisastrongcorrelationshipbetweenMFs'AUMandsharepricemovement.

Figure1:Activefunds:Changeinunitsvs.returns

1000

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Changein#offundunits(bn,LHS)Thereturnofequityfundsindexinthepast12months(RHS)

Thereturnofhybridfundsindexinthepast12months(RHS)

100%75%50%25%0%

-25%-50%-75%

Source:Wind,UBS-Sestimates.Note:DataasofJune2024.

Figure2:Activefunds:ChangeinAUMvs.returns

ChinaEquityStrategy12August2024abc3

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Changein#offundAUM(RMBbn,LHS)——Thereturnofequityfundsindexinthepast12months(RHS)

Thereturnofhybridfundsindexinthepast12months(RHS)

Source:Wind,UBS-Sestimates.Note:DataasofJune2024.

RisingpassivefundAUMhelpingstabilisemarket

Passivefundshaveclearlyoutperformedactiveonesamidavolatilemarketforthepasttwoyears.InH124,passivefundshadanincreaseof207.7bnunitsandAUMexpansionofRmb322.2bn.ParticularlyinQ124,theirAUMroseasubstantialRmb311.3bn,thelargestquarterlygainintheirhistory.

Importantly,thesubstantialpassivefundAUMexpansionmainlyreflectedinvestorpursuitofbroad-basedETFs,especiallythosetrackinglarge-capbluechips.YTD,theCSI300IndexETFhasreceivednetinflowofRmb400bn,whilesector,themeandstyleETFshavehadnetoutflowoverall.

Figure3:Passivefunds:Changeinunitsvs.returns

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Changein#offundunits(bn,LHS)Changein#offundAUM(RMBbn,RHS)

Source:Wind,UBS-Sestimates.Note:DataasofJune2024.

ChinaEquityStrategy12August2024abc4

Figure4:AUMchangesforETFstrackingkeyindexesYTD

5,000RMB100mn

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-500CSI300CSI500CSI1000CSI2000SSE50

NetinflowsYTD2024(RMB100mn)

Source:Wind,UBS-S.Note:Dataasof9Aug2024.

Inaddition,notably,netinflowintobroad-basedindexETFshasusuallyfollowedoverallmarketpullbacks.DuringmarketdownturnsYTD(frommid-JanuarytoearlyFebruaryandsincelateJune),ETFstrackingkeyindexes(eg,theCSI300IndexETFandtheCSI500IndexETF)hadsignificanttradingamountincreases.Webelievethatdemonstrateslong-terminvestors’recognitionofA-shareallocationvalue,whichprovidessomedownsideprotectionincapitalmarkets.

Figure5:CSI300IndexETFtradingamount

-RMBbn

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1/21/161/302/213/63/204/34/195/85/226/56/207/47/188/1

TotalCSI300ETFtradingamount(RMBbn)

---TotalCSI300ETFdailyaveragetradingamountin2023(RMBbn)

Source:Wind,UBS-S.Note:Dataasof9Aug2024.

Figure6:CSI500IndexETFtradingamount

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TotalCSI500ETFtradingamount(RMBbn)

TotalCSI500ETFdailyaveragetradingamountin2023(RMBbn)

Source:Wind,UBS-S.Note:Dataasof9Aug2024.

Wherecouldredemption-associatedmoneygo?

AfterMFinvestorsredeemactiveMFsunits,wherethatmoneygoesiscomplexandhardtotrack.Marketconsensuspointstoseveralpotentialuses:1)prepayingmortgages;2)savingup;3)buyinglow-riskmoneymarketfundsorbondfunds;and4)buyinginsuranceproducts.

AsChina’ssixmajorSOEbanksarecuttingdepositratesandreturnsonwealthmanagementproductsaretrendinglower,prepayingmortgagesseemstobetheoptimalchoiceforinvestorswhoalsohavemortgages.Therationaleisthat:1)existingmortgageshavemuchhigherratesthanthosefornewlyboughthomes;and2)mortgageratesarehigherthantherisk-freerateofreturn(eg,thedepositrate).

Forexample,inShanghai,themortgageratefloorforfirst-homebuyerswasLPRplus35bpsfrom24July2021to27May2024.Asof25Sept2023,borrowersofallexistingfirst-homemortgagescouldapplytothelendingfinancialinstitutionforanewmortgagetoswapouttheexistingone.Therateofthenewmortgagecannotbelowerthanthepolicymortgageratefloorintherespectivecityonthedateofapprovaloftheoriginalmortgage.Thatsaid,asof28May2024,themortgagefloorrateforfirsthomeswasloweredfurthertoLPRminus45bps.

ChinaEquityStrategy12August2024abc5

Figure7:SixmajorSOEbankslowered1-yeardepositrateson25July

Banks

1-YearDepositInterestRate

IndustrialandCommercialBankofChina

1.35%

AgricultureBankofChina

1.35%

BankofChina

1.35%

ChinaConstructionBank

1.35%

BankofCommunications

1.35%

PostalSavingsBank

1.38%

Source:Companywebsites,UBS-S

Figure8:Expectedannualreturnsof1-yearwealthmanagementproducts

%

Theexpectedannualreturnofmarket-wide1-yearwealthmanagementproduct

Source:Wind,UBS-S

Figure9:Yu'eBao7-dayannualisedrateofreturn

8.007.006.005.004.003.002.001.000.00

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%

Yu'eBao7-dayannualizedrateofreturn

Source:Wind,UBS-S

Increasingsavingsandbuyinglow-riskmoneymarketfunds/bondfundsbothreflectthelow-riskappetiteamonghouseholds.Specifically,householdsareincreasingprecautionarysavingsandlow-riskfinancialinvestmentstocopewithpotentialuncertainty.Weestimatethatbyend-Q224,China’saccumulatedhouseholdexcesssavingspassedRmb6trn(atRmb6.13trn).Meanwhile,moneymarketfundAUMandbondfundAUMgrowthhaveacceleratedsinceFebruary2024,surpassingRmb10trnandRmb13trn,respectively,atendofJuly2024.

Figure10:Highaccumulatedhouseholdexcesssavings

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Q1/20Q3/20Q1/21Q3/21Q1/22Q3/22Q1/23Q3/23Q1/24nAccumulatedhouseholdexcesssaving

10.009.008.007.006.005.004.003.002.00

Source:CEIC,UBS-Sestimates

Figure12:BondfundAUMhasgrownrapidlyrecently

Figure11:MoneymarketfundAUMhasrisenrapidlyrecently

ChinaEquityStrategy12August2024abc6

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Source:Wind,UBS-S.Note:Dataasof31July2024.

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Source:Wind,UBS-S.Note:Dataasof31July2024.

Moreover,notably,insuranceproductshavegainedtractionamonginvestors.AttheendofMarch2024,thebalanceoffundsdeployedbyChineseinsurersapproachedRmb30trn.

Weestimateinsurers'moneyflowintoequityfundsinQ124wasRmb272bn.Asofend-Q124,thebalanceofinsurancefundsinvestedinstocksandfundshitRmb3.6trn(accountingfor12%ofthetotalbalanceofinsurancefundsdeployed),withgrowthaccelerating.Asyieldsonbondswithahigh-yieldtrackrecord–suchasAA-rated10-yearcorporatebondsandAA-rated10-yearlocalgovernmentfinancingvehicle(LGFV)bonds–haveslidtoc2.4%recently,wethinkinsuranceproductsmayremainattractivetoinvestorsforsometime,therebyexpandingtheinvestablefundsofinsurers,whileinsurers’exposuretoequityassetscouldrise.

Figure13:Insurancefunds’investmentsinstocksandfundshaverampedup

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Insurancefunds'investmentintostocksandfunds%ofInsurancefundinvestedinstocksandfunds(RHS)

Source:Wind,UBS-S

Figure15:Yieldoflong-termCGBstrendinglower

Figure14:YieldofcorporatebondsandLGFVbondsdeclining

ChinaEquityStrategy12August2024abc7

5.805.304.804.303.803.302.802.30

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Apr-20

Jul-20

Oct-20

Jan-21

Apr-21

Jul-21

Oct-21

Jan-22

Apr-22

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Apr-24

Jul-24

%

10YLGFVbondyield(AA)10YCorporatebondyield(AA)

Source:Wind,UBS-S.Note:Dataasof8Aug2024.

4.103.803.503.202.902.602.302.00

Jan-20

Apr-20

Jul-20

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Jan-21

Apr-21

Jul-21

Oct-21

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10YCGByield30YCGByield50YCGByield

Source:Wind,UBS-S.Note:Dataasof8Aug2024.

Whenwillredemptionstopurchasesrebalance?

WebelievepotentialcatalystsforfundinvestorstopurchaseactiveMFsagaininclude:1)arisingstockmarket,whichwoulddriveupreturnsforfundinvestors;2)afurtherdeclineinmortgagerates;3)adropindepositratesorwealthmanagementproductyields;and4)higherlong-termshareholderreturnsasaresultofthepromotionofan"investor-oriented"A-sharemarket.

Aswediscussed,MFs’newissuancelagstheirreturnperformance.AstockmarketrallywouldnaturallyboostMFs’newissuance.Withcontinueddeclinesinmortgagerates,depositratesandwealthmanagementproductreturns,investinginMFsmayseemrelativelymoreattractivetoinvestors.Meanwhile,withauthoritiesrepeatedlycallingforimprovingtheinherentstabilityofcapitalmarketsandthesenseofgainforinvestors(includingtheThirdPlenumofthe20thCPCCentralCommittee,therecentPolitburomeetingandtheNationalNine-PointGuidelines),structuralimprovementintheecosystemofChina'scapitalmarketcouldensue(seenote).Notably,China’sA-sharecompanieshaverampedupdividendsandbuybacksinrecentyears.ThepastdecadehadasignificantriseinaggregatedividendspaidbyallA-sharecompanies,fromRmb526bnin2013tooverRmb1.7trnin2023(up>3x),implyinga12.5%CAGR.Meanwhile,A-sharecompaniesreleasedatotalof2,083stockbuybackprogramsinH124,upasizeable162%from795in2019.TheimprovingsenseofgainforinvestorscouldleadthemtopurchaseMFs,therebyenteringtheA-sharemarket.

Figure16:DividendspaidbyallA-sharecompanies(byyear)

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nDividendpaidbyallA-sharecompanies(RMB100mn)

Source:Wind,UBS-S

Figure17:Moneyamountsofstockbuybackprogrammes

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Source:Wind,UBS-S.Note:Dataasof31July2024.

ChinaEquityStrategy12August2024abc8

ValuationMethodandRiskStatement

ForvariousstocksacrosstheindustrieswecoverintheHongKongandmainlandChinastockmarkets,weuseavarietyofvaluationapproaches,includingDCFmodels,Gordongrowthmodelanalysisandrelativevaluationanalysisusingvariousmultiples,suchasPE,EV/EBITDAandP/BV.

WethinktherisksfacingChina'sequitiesincludeahardlandingforthepropertymarket,acapitalexodusassociatedwithcurrencydepreciationandslowstructuralreformprogress.Inourview,anygovernmentpoliciesthatdonotadequatelyaddresstheseriskscouldresultinashocktothemarket.Forexample,anexcessofstimuluspoliciescouldposearisktothetransitionfromaninvestment-driventoaconsumption-driveneconomyandincreasethedebtofgovernmentandstate-ownedenterprises.

ChinaEquityStrategy12August2024abc9

RequiredDisclosures

ThisdocumenthasbeenpreparedbyUBSSecuritiesCo.Limited,anaffiliateofUBSAG.UBSAG,itssubsidiaries,branchesandaffiliates,includingCreditSuisseAGanditssubsidiaries,branchesandaffiliatesarereferredtohereinas"UBS".

ForinformationonthewaysinwhichUBSmanagesconflictsandmaintainsindependenceofitsUBSGlobalResearchproduct;historicalperformanceinformation;certainadditionaldisclosuresconcerningUBSGlobalResearchrecommendations;andtermsandconditionsforcertainthirdpartydatausedinresearchreport,pleasevisit

/disclosures

.Unlessotherwiseindicated,informationanddatainthisreportarebasedoncompanydisclosuresincludingbutnotlimitedtoannual,interim,quarterlyreportsandothercompanyannouncements.Thefigurescontainedinperformancechartsrefertothepast;pastperformanceisnotareliableindicatoroffutureresults.Additionalinformationwillbemadeavailableuponrequest.UBSSecuritiesCo.LimitedislicensedtoconductsecuritiesinvestmentconsultancybusinessesbytheChinaSecuritiesRegulatoryCommission.UBSactsormayactasprincipalinthedebtsecurities(orinrelatedderivatives)thatmaybethesubjectofthisreport.Thisrecommendationwasfinalizedon:09August202402:45PMGMT.UBShasdesignatedcertainUBSGlobalResearchdepartmentmembersasDerivativesResearchAnalystswherethosedepartmentmemberspublishresearchprincipallyontheanalysisofthepriceormarketforaderivative,andprovideinformationreasonablysufficientuponwhichtobaseadecisiontoenterintoaderivativestransaction.WhereDerivativesResearchAnalystsco-authorresearchreportswithEquityResearchAnalystsorEconomists,theDerivativesResearchAnalystisresponsibleforthederivativesinvestmentviews,forecasts,and/orrecommendations.QuantitativeResearchReview:UBSGlobalResearchpublishesaquantitativeassessmentofitsanalysts'responsestocertainquestionsaboutthelikelihoodofanoccurrenceofanumberofshorttermfactorsinaproductknownasthe'QuantitativeResearchReview'.Viewscontainedinthisassessmentonaparticularstockreflectonlytheviewsonthoseshorttermfactorswhichareadifferenttimeframetothe12-monthtimeframereflectedinanyequityratingsetoutinthisnote.Forthelatestresponses,pleaseseetheQuantitativeResearchReviewAddendumatthebackofthisreport,whereapplicable.Forpreviousresponsespleasemakereferenceto(i)previousUBSGlobalResearchreports;and(ii)wherenoapplicableresearchreportwaspublishedthatmonth,theQuantitativeResearchReviewwhichcanbefoundat

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quantitative,orcontactyourUBSsalesrepresentativeforaccesstothereportortheQuantitativeResearchTeamonqa@.AconsolidatedreportwhichcontainsallresponsesisalsoavailableandagainyoushouldcontactyourUBSsalesrepresentativefordetailsandpricingortheQuantitativeResearchteamontheemailabove.

AnalystCertification:

Eachresearchanalystprimarilyresponsibleforthecontentofthisresearchreport,inwholeorinpart,certifiesthatwithrespecttoeachsecurityorissuerthattheanalystcoveredinthisreport:(1)alloftheviewsexpressedaccuratelyreflecthisorherpersonalviewsaboutthosesecuritiesorissuersandwerepreparedinanindependentmanner,includingwithrespecttoUBS,and(2)nopartofhisorhercompensationwas,is,orwillbe,directlyorindirectly,relatedtothespecificrecommendationsorviewsexpressedbythatresearchanalystintheresearchreport.

UBSGlobalResearch:GlobalEquityRatingDefinitions

12-MonthRating

Definition

Coverage1

IBServices2

Buy

FSRis>6%abovetheMRA.

52%

25%

Neutral

FSRisbetween-6%and6%oftheMRA.

40%

22%

Sell

FSRis>6%belowtheMRA.

8%

21%

Short-TermRating

Definition

Coverage3

IBServices4

Buy

Stockpriceexpectedtorisewithinthreemonthsfromthetimetheratingwasassignedbecauseofaspecificcatalystorevent.

<1%

<1%

Sell

Stockpriceexpectedtofallwithinthreemonthsfromthetimetheratingwasassignedbecauseofaspecificcatalystorevent.

<1%

<1%

Source:UBS.Ratingallocationsareasof30June2024.

1:Percentageofcompaniesundercoveragegloballywithinthe12-monthratingcategory.

2:Percentageofcompanieswithinthe12-monthratingcategoryforwhichinvestmentbanking(IB)serviceswereprovidedwithinthepast12months.

3:PercentageofcompaniesundercoveragegloballywithintheShort-Termratingcategory.

4:PercentageofcompanieswithintheShort-Termratingcategoryforwhichinvestmentbanking(IB)serviceswereprovidedwithinthepast12months.

ChinaEquityStrategy12August2024abc10

KEYDEFINITIONS:ForecastStockReturn(FSR)isdefinedasexpectedpercentagepriceappreciationplusgrossdividendyieldoverthenext12months.Insomecases,thisyieldmaybebasedonaccrueddividends.MarketReturnAssumption(MRA)isdefinedastheone-yearlocalmarketinterestrateplus5%(aproxyfor,andnotaforecastof,theequityriskpremium).UnderReview(UR)StocksmaybeflaggedasURbytheanalyst,indicatingthatthestock'spricetargetand/orratingaresubjecttopossiblechangeinthenearterm,usuallyinresponsetoaneventthatmayaffecttheinvestmentcaseorvaluation.Short-TermRatingsreflecttheexpectednear-term(uptothreemonths)performanceofthestockanddonotreflectanychangeinthefundamentalvieworinvestmentcase.EquityPriceTargetshaveaninvestmenthorizonof12months.

EXCEPTIONSANDSPECIALCASES:UKandEuropeanInvestmentFundratingsanddefinitionsare:Buy:Positiveonfactorssuchasstructure,management,performancerecord,discount;Neutral:Neutralonfactorssuchasstructure,management,performancerecord,discount;Sell:Negativeonfactorssuchasstructure,management,performancerecord,discount.CoreBandingExceptions(CBE):Exceptionstothesta