Robo-investing by millennials driving Chinese stocks, says BofA Merrill Lynch

So-called “robo investing” has helped boosted the MSCI China index, led by millennials who prefer to use such automated money management, according to Bank of America Merrill Lynch.

Robo-advisors, or digital platforms that provide automated algorithm-driven financial planning services, are more likely to advise someone of around 28 years old to allocate as much as 30-40 per cent of their portfolio in emerging markets, far above the 10-15 per cent range by institutional investors, says Ajay Kapur, Merrill’s Asia Pacific equity and global emerging markets strategist.

He said millennials, generally accepted as those born between 1977 and 1994, who have set up a robo-investing accounts are helping to drive money into emerging markets exchange-traded funds (ETFs), a large part of which automatically goes into Chinese equities, as they account for around 22 per cent of such indexes.

“If you are an institutional trader involved in asset allocation and are wondering what’s going on with these Chinese stocks going up, it’s because ETFs – especially retail-orientated ETFs – are receiving a lot of flows and I don’t see that trend stopping any time soon,” Kapur said.

Active investors are closing “underweight positions” on China as emerging markets are one of the few equity sectors where active investors are seeing inflows. Elsewhere in the world, active investors are generally experiencing outflows, Kapur said.

Bank of America Merrill Lynch continues to sees double digit growth in Chinese stocks because valuations remain at decent levels of 13 times forward price-to-earnings ratios, and given global inflation is likely to stay low, the dollar should remain stable.

Earnings per share growth in China is forecast at 17.2 per cent this year, and 13.9 per cent in 2018.

Kapur tips the tech sector, even though it looks expensive after this year’s gains, because it’s earnings power remains strong.

He also likes rate-sensitive companies from sectors such as property, financials, and utilities while being underweight in defensive sectors, such as telecoms and consumer staples.

He added investors are probably underestimating the power of China’s new economy, particularly its technology, healthcare, defence, consumer services, and telecom equipment sectors, which he considers the “markers and drivers” of domestic innovation and growth.

Apart from the few Chinese stocks that investors do own, many Chinese new economy companies are unlisted and unknown but are in fact very large with huge revenue bases, spending and tax payments, Kapur said.

“There is a lot of creative stuff happening that should form your new tax base. This surprise data in technology and in consumer services is going to continue,” Kapur said.

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