Ping An to focus on cautious allocations as China slows

Ping An Insurance is to take a cautious investing approach because of the state of key Chinese and global economic conditions, the firm’s CIO said.

With a trio of key indicators expected to remain low for the foreseeable future, the Chinese insurance giant is to focus on fixed income products and real estate assets to generate a stable income.

Timothy Chan, the group’s chief investment officer, said that the “three lows” - low growth, low inflation and low interest rates – meant that Ping An needed to focus on cautious investments.

“In our portfolio, we still prefer fixed-income assets, in which we started building our allocations two years ago, because we look for relatively stable income amid a slowing economy,” Chan said at a conference in Shanghai last Friday (August 21), following the release of the firm’s first-half results.

“We believe that China’s real interest rates will be kept at a low level, thus there could be further cuts to the benchmark lending interest rate and reserve requirement ratio. So we are prepared to build a longer duration by investing in more long-term bonds [in our fixed-income portfolio].”

The insurer said it holds a positive long-term view on equity assets, but does not plan to raise its equity allocation significantly. “We look for defensive-growth stocks now, and we will consider investing in such companies’ equity if they can satisfy this criteria,” said Chan.

Chan stressed that investors had to be aware of credit and liquidity risk under the “three-low” economic conditions. “You can imagine credit risk will be a major problem,” he said. “We have built internal credit analysis over the past ten years, which helps us to control such risks in an economic downturn.

“To a certain extent, the mainland equity market problem [in the past few months] has had a problem of liquidity risk, but we maintain a higher proportion of liquid assets which can be traded in the short term.”

Chan stressed the importance of risk controls, which have been part of Ping An’s investment strategy over the past two years. He has been cautious over counterparty credit risks in China, so Ping An has mostly invested in debt schemes and trust products which are backed by state-owned enterprises and local government  bodies, because they will have better cash flow and the ability to pay debt.

Ping An saw its investment portfolio assets grow by 12% in the first six months of this year to Rmb1.64 trillion ($256.7 billion), from Rmb1.47 trillion as of the end of 2014. The insurance portfolio generated an annualised total investment yield of 7.7%, according to the insurer’s interim report which was released last Thursday (August 20).

Chan said he expected the portfolio to generate a stable return in the second half of 2015 following the onshore A-share market swings of the past two months.

Ping An increased its allocations to equity assets in the first half of this year. It allocated 17.5% of its AUM to equities at the end of June, up from 14.1% in 2014.

The insurer allocated 77.1% to fixed-income assets in the first half, down from 79.7% at the end of 2014. It was notable that alternative fixed-income allocations - non-standard banking wealth management products and trust schemes - increased in the first half. It followed the group’s plan to boost alternatives exposure earlier this year.