Archived material may contain dated performance, risk and other information. Current performance may be lower or higher than the performance quoted in the archived material. For the most recent month-end fund performance information visit www.calamos.com. Archived material may contain dated opinions and estimates based on our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions at the time of publishing. We believed the information provided here was reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

Performance data quoted represents past performance, which is no guarantee of future results. Current performance may be lower or higher than the performance quoted. The principal value and return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance reflected at NAV does not include the Fund’s maximum front-end sales load. Had it been included, the Fund’s return would have been lower.

Archived on July 17, 2019

Investing in China’s Expanding Universe of Opportunity While Maintaining a Risk-Managed Approach

Nick Niziolek

Followers of our posts and commentaries know that we have long held a positive view on China, specifically as it relates to the growth of the country’s middle class. In recent years, many investors have become increasingly focused on the decelerating growth and significant leverage in the Chinese economy. While not losing sight of these factors, we are also focusing on the transitions that are underway in China’s economy—from investment to consumption and from public sector to private sector. These shifts have created powerful tailwinds for many consumer, information technology, and health care companies, both those domiciled in China as well as multinational corporations selling into China’s growth story.

We have always monitored China’s policy actions and reform initiatives through the lens of whether these activities support the medium-term goal of a more consumption-based economy with a greater contribution from the private sector. Overall, we believe China is making good progress in this regard, and we have remained more constructive on China than a number of other investment managers. We believe our stance has been affirmed by China’s strong market performance over recent years, including within the investment technology and health care sectors we favor.

Since the middle of last year, we have expanded our view of investable opportunities in China. While we believe China remains committed to the medium-term goal of growing consumption and the private sector, the country is equally if not more focused on its longer-term goals of solidifying its position as the dominant power in Asia and establishing itself as equal to the U.S. on the global stage. China’s push to have the renminbi to IMF’s special drawing rights, its opening of local markets, its founding of the Asian Infrastructure Investment Bank, and the “One Road, One Belt” infrastructure program all support its bid for greater influence in Asia and globally, including the internationalization of the renminbi. As one measure of China’s progress, we see China is converging ever closer with U.S., when measured by market cap to GDP (Figure 1).

Figure 1. U.S. versus China: Market Cap to GDP trend
U.S. versus China: Market Cap to GDP trend

Source: CLSA

As China pursues its longer-term goals, we see tailwinds for many more industries within the country. This has led us to increase our weighting to China, including through investments in several state-owned-enterprises (SOEs) and infrastructure-related companies that we may have found less compelling in the past.

Convertible Structures Afford Risk-Managed Exposure
Of course, we recognize that these companies are not without their own risks. They may be more influenced by policy and regulation changes; historically, many have been less focused on efficiencies than businesses in the private sector; and in some instances, they may also entail more balance-sheet risk than their private sector counterparts. However, we see significant opportunities, particularly for investors who are willing to do their homework. We believe some of the risks we previously saw in SOEs and investment related companies are mitigated by the course government policy is likely to take over the next six months.

For those of our strategies that have the flexibility to utilize convertible securities, we have additional tools for tapping into the expanding opportunities we see in China, consistent with a risk-managed posture. Within emerging markets, Chinese and Hong Kong companies have been active issuers of convertible securities. Convertible securities have been key in bolstering our overall exposure to China, including in SOEs and companies tied more closely to investment rather than consumption.

As interest rates have declined in China, the bond floors of our convertible positions have moved up, improving downside protection, while the increased volatility we have seen in the market recently increased the values of the embedded call options. The breadth of the convertible market has allowed us to participate in the strong rally we have seen within cyclical sectors, with our delta to the underlying equities increasing as the rally in China’s equity market has progressed.

We typically pare convertible positions when their deltas become equity like, rolling into more balanced structures on an ongoing basis. This active management has permitted us to keep up with the equity markets during strong rallies, while providing better downside protection during recent pullbacks we’ve seen and expect to continue throughout the remainder of the year.




Past performance is no guarantee of future results The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.

The information in this report should not be considered a recommendation to purchase or sell any particular security. The views and strategies described may not be suitable for all investors.

As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.

Convertible securities entail interest rate risk and default risk.

Delta is a measure of a convertible security’s sensitivity to its underlying equity.

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Archived material may contain dated performance, risk and other information. Current performance may be lower or higher than the performance quoted in the archived material. For the most recent month-end performance information, please CLICK HERE. Archived material may contain dated opinions and estimates based on our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions at the time of publishing. We believed the information provided here was reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

Performance data quoted represents past performance, which is no guarantee of future results. Current performance may be lower or higher than the performance quoted. The principal value and return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance reflected at NAV does not include the Fund’s maximum front-end sales load. Had it been included, the Fund’s return would have been lower. For the most recent month-end fund performance information visit www.calamos.com.