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Ignorance impedes growth of China ETF market, survey reveals

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China’s burgeoning exchange traded fund industry has been outshone by the explosive growth of domestic active strategies this year, with market participants blaming a persistent lack of knowledge among retail investors and weak product diversity as the key barriers to higher adoption of ETFs.

Only 91 new ETFs had been rolled out in China this year by December 8, a number that only just exceeds the 90 such product launches recorded for 2019, data provided by Morningstar show. Total assets in the onshore ETF market stood at Rmb1.06tn ($162bn).

The modest total for this year is in sharp contrast to the more than 1,200 non-ETF fund launches during the same period. Active equities funds grabbed most of the limelight attracting almost 65 per cent of initial fundraising assets out of a record-breaking Rmb3tn in assets invested across all fund types.

Most individual investors in China still have insufficient knowledge of ETF products, according to a survey jointly conducted by JPMorgan Asset Management, its Shanghai-based joint venture China International Fund Management and investment platform Snowball Finance this month.

This article was previously published by Ignites Asia, a title owned by the FT Group.

The research collected the responses of 13,113 investors and industry professionals, of whom 12,398 were retail investors and 350 institutional investors.

For those who have yet to invest in ETFs, lack of knowledge was the main problem, according to the report. More than 55 per cent of retail investors in this group cited this was the main reason they had been hesitant to invest in ETFs.

Of those who were familiar with ETFs, most only knew about broad-based ETFs and had little knowledge about sector, thematic, smart beta, and investment-style ETFs for strategic allocation.

The report’s authors called for industry participants to leverage social media to enhance investor education and urged fund managers and those in the distribution network to establish an information-sharing platform on ETF products.

Li Yimei, Beijing-based chief executive of China Asset Management, China’s largest ETF manager, told Ignites Asia in September that the growing role of third-party online distributors had provided a natural channel to engage with young investors and educate potential investors about ETFs.

Equities ETFs were the most popular ETF category among retail investors, with broad-based ETFs being the most popular equities strategy. More than 80 per cent of retail investors surveyed had invested in ETFs tracking major stock indices such as the CSI 300 and SSE 50.

Broad-based ETFs would probably remain the primary choice for retail investors, the report said, although they might also begin to show a preference towards thematic and smart beta strategies as well.

The report’s authors also concluded that if China had more niche offerings in the ETF space the market would attract more assets.

This might be beginning to happen. Issuers have submitted applications for seven “food and beverage” ETFs this year, and ChinaAMC is already raising initial assets for an ETF tracking companies in that sector.

The survey found that brand recognition was less of a factor for retail investors when choosing ETFs, with less than 40 per cent saying they would invest in a particular ETF because of the company name.

Zhang Bixuan, Beijing-based analyst for Jian Financial Information Technology Company, however, said that while investors do tend to pay less attention to company brands when investing in passive ETFs compared with active funds, the larger asset managers still had certain advantages.

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignitesasia.com.

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Emerging Markets

Bond sell-off roils markets, ex-Petrobras chief hits back, Ghana’s first Covax vaccines

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The yield on the benchmark 10-year Treasury exceeded 1.5 per cent for the first time in a year and the outgoing head of Petrobras warns Brazil’s President Jair Bolsonaro against state controlled fuel prices. Plus, the FT’s Africa editor, David Pilling, discusses the Covax vaccine rollout in low-income countries. 

Wall Street stocks sell off as government bond rout accelerates

https://www.ft.com/content/ea46ee81-89a2-4f23-aeff-2a099c02432c

Ousted Petrobras chief hits back at Bolsonaro 

https://www.ft.com/content/1cd6c9fb-3201-4815-9f4f-61a4f0881856?

Africa will pay more for Russian Covid vaccine than ‘western’ jabs

https://www.ft.com/content/ffe40c7d-c418-4a93-a202-5ee996434de7


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Petrobras/Bolsonaro: bossa boots | Financial Times

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“Brazil is not for beginners.” Composer Tom Jobim’s remark about his homeland stands as a warning to gung-ho foreign investors. Shares in Petrobras have fallen almost a fifth since President Jair Bolsonaro said he would replace the widely respected chief executive of the oil giant.

Firebrand Bolsonaro campaigned on a free-market platform. Now he is reverting to the interventionism of leftist predecessors. It is the latest reminder that a country with huge potential has big political and social problems.

Bolsonaro reacted to fuel protests by pushing for a retired army general to supplant chief executive Roberto Castello Branco, who had refused to lower prices. This is politically advantageous but economically short-sighted.

Fourth-quarter ebitda beat expectations at R$60bn (US$11bn), announced late on Wednesday, a 47 per cent increase on the previous quarter. This partly reflected the reversal of a R$13bn charge for healthcare costs. Investors now have to factor the cost of possible fuel subsidies into forecasts. The last time Petrobras was leaned on, it set the company back about R$60bn (US$24bn at the time). That equates to 40 per cent of forecast ebitda for 2021.

At just over 8 times forward earnings, shares trade at a sharp discount to global peers. Forcing Petrobras to cut fuel prices will make sales of underperforming assets harder to pull off and debt reduction less certain. Bidders may fear the obligation to cap prices will apply to them too.

A booming local stock market, rock bottom interest rates and low levels of foreign debt are giving Bolsonaro scope to spend his way out of the Covid-19 crisis. But the economy remains precarious. Public debt stands at 90 per cent of gross domestic product. The real — at R$5.40 per US dollar — remains near record lows. Brazil’s credit is rated junk by big agencies.

Rising developed market yields will make financings costlier for developing nations such as Brazil. So will high-handed treatment of minority investors. It sends a dire signal when a government with an economic stake of just over a third uses its voting majority to deliver a boardroom coup.

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South Africa’s economy is ‘dangerously overstretched’, officials warn

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South Africa is pushing ahead with plans to shore up its precarious public finances as officials warn the economy is “dangerously overstretched” despite the recent boom in commodity prices.

Finance minister Tito Mboweni hailed “significant improvement” as he delivered the annual budget on Wednesday and said that state debts that will hit 80 per cent of GDP this year will peak below 90 per cent by 2025, lower than initially feared.

But Mboweni warned that President Cyril Ramaphosa’s government was not “swimming in cash” despite a major recent tax windfall. The Treasury now expects to collect almost 100bn rand ($6.8bn) more tax than expected this year after a surge in earnings for miners. This compares with a projected overall tax shortfall of more than 200bn rand. Still, the finance minister made clear that spending cutbacks would be necessary.

“Continuing on the path of fiscal consolidation during the economic fallout was a difficult decision. However, on this, we are resolute,” Mboweni said. “We remain adamant that fiscal prudence is the best way forward. We cannot allow our economy to have feet of clay.”

The pandemic has hit South Africa hardest on the continent, with 1.5m cases recorded despite a tough lockdown. An intense second wave is receding and the first vaccinations of health workers started this month. More than 10bn rand will be allocated to vaccines over the next two years, Mboweni said.

‘We remain adamant that fiscal prudence is the best way forward’ – South African finance minister Tito Mboweni © Sumaya Hisham/Reuters

Even before the pandemic’s economic hit, a decade of stagnant growth, corruption and bailouts for indebted state companies such as the Eskom electricity monopoly rotted away what was once a prudent fiscus compared with its emerging market peers. 

Government spending has grown four per cent a year since 2008, versus 1.5 per cent annual growth in real GDP. The country’s credit rating was cut to junk status last year. Despite this year’s cash boost, the state expects to borrow well over 500bn rand per year over the next few years. The cost to service state debts is set to rise from 232bn rand this year to 338bn rand by 2023, or about 20 cents of every rand in tax.

The fiscal belt-tightening will have implications for South Africa’s spending on health and social services. On Wednesday Mboweni announced below-inflation increases in the social grants that form a safety net for millions of South Africans. “We are actually seeing, for the first time that I can recall, cuts in the social welfare budget,” said Geordin Hill-Lewis, Mboweni’s shadow in the opposition Democratic Alliance.

The finance minister is also facing a battle with union allies of the ruling African National Congress over a plan to cap growth in public sector wages. South Africa lost 1.4m jobs over the past year, according to statistics released this week. The jobless rate — including those discouraged from looking for work — was nearly 43 per cent in the closing months of 2020.

The South African treasury expects the economy to rebound 3.3 per cent this year, after a 7.2 per cent drop last year, and to expand 2.2 per cent and 1.6 per cent next year and in 2023 — growth rates that are widely seen as too low in the long run to sustain healthy public finances.

“The key challenges for South Africa do however persist, clever funding decisions aside,” Razia Khan, chief Middle East and Africa economist for Standard Chartered, said. “Weak structural growth and the Eskom debt overhang must still be addressed.” 



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