China state pension may reverse 2022 losses on turnaround bets
China’s national pension fund could reverse its losses in 2022 with its additional $17.8 billion investments in domestic stocks, as the market is on track for a rebound, analysts said.
The remarks came after the National Social Security Fund (NSSF) reported its second-worst investment performance in 2022, dragged by the bearish domestic market.
“Although the market was bearish in 2022 and there were paper losses over the shorter term, NSSF could still get returns over a two to three-year investment horizon,” said Pan Yanjun, research analyst at Cerulli Associates.
In 2022, the Social Security Fund recorded investment losses of Rmb138.1 billion ($18.9 billion), or -5.07% — the fund’s second-worst performance since its inception in 2000. Its worst performance was the 6.79% in losses in 2008.
Last year, NSSF’s realised income was Rmb83 billion; it lost Rmb221 billion in the fair value change of trading assets, including bonds and equities, widening from its Rmb111.2 billion in losses in 2021.
In 2022, the Shanghai Stock Exchange Composite Index was down 15.1%, while the Shenzhen Stock Exchange Component Stock Index dived 25.9%.
HOME BET
Despite the market turmoil, NSSF maintained its strategic focus and carried out dynamic allocation by adding Rmb130 billion ($17.8 billion) in domestic equities, it said in a press release on September 28, when it released the 2022 annual report.
In the second quarter of last year, NSSF added investments in four areas: promising industries with a high return on equity (ROE); companies with continued high dividends; blue-chip stocks with excellent performance; and consumer and pharmaceutical sectors with high certainty of performance growth, Pan noted, quoting data provider Choice and listed companies’ annual reports.
In the fourth quarter of last year, the fund again added positions in industries like real estate, automobile, military, chemical, computer, special equipment, aquaculture, medical equipment, power equipment, oil and gas extraction and services.
“The performance of some of these sectors has been showing an upward trend and reached an inflection point in 2022. This might be the reason for NSSF’s investments in them,” Pan told AsianInvestor.
Pan said she was neutral to optimistic about NSSF’s performance in 2023, saying it should be better than 2022.
As of the end of 2022, NSSF’s total assets under management (AUM) were Rmb2.88 trillion ($394.4 billion), down from Rmb3.02 trillion a year ago. Trading assets accounted for 52%, down from 55% in 2021.
NSSF’s average annual investment return rate since 2000 has been at 7.66%, with a cumulative investment income of Rmb1.66 trillion as of end-2022.
STABILISING THE MARKET
Despite the 2022 losses, NSSF said it would continue to seize opportunities amid market fluctuations while contributing to stabilising the market and boosting confidence.
“Floating losses in earnings are rare in recent years. Objectively, the main reason is that the global political and economic situation underwent profound changes in 2022, while the financial market turmoil intensified, resulting in very difficult conditions for fund investment operations,” it noted.
Pressured by inflation and the unprecedented rate hikes in the US, the MSCI All Country World Index (ACWI) slumped 18%, while the Bloomberg Barclays Global Aggregate Index plummeted 16.2%.
“Overall, although there was a certain amount of book losses in 2022, it laid the foundation for achieving better long-term returns,” NSSF said, noting that the performance beat the corresponding market indexes, and was within the risk level that the fund could withstand.
NSSF’s negative return was relatively narrow, compared to other pension funds globally.
Amid weakening market confidence and sluggish economic recovery, Chinese state-owned investors have been supporting the market.
In August, the China Securities Regulatory Commission (CSRC) and National Administration of Financial Regulation called for NSSF and some large banks and insurers to expand mid-to long-term investment in A shares to support the financial market.
Representatives of the participating financial institutions vowed to help stabilise shares and boost economic development.
Most recently on Wednesday, Oct 11, Central Huijin Investment, the domestic investment vehicle of Chinese sovereign wealth fund China Investment Corporation (CIC) added its stake in the nation’s big four banks by about $65 million and said it will further increase holdings over the next six months.
This signalled state-owned investors’ intensified efforts to stabilise the domestic market. Its previous moves to largely add positions in state-owned banks were in 2008 and 2015 during crises.
Following the development, onshore and offshore Chinese stock indexes were up 1% to 1.9% across Shanghai, Shenzhen and Hong Kong on Thursday, Oct 12.
“The current valuation of domestic equities is relatively attractive, which provides a safety margin for long-term investments,” said Desiree Wang, chief executive officer of JP Morgan Asset Management China.
“Recent supportive policies, such as increasing fiscal expenditure and stimulating real estate demands, have boosted market confidence. We expect to see the recovery momentum to be reflected in the fourth quarter or 2024 data,” she told AsianInvestor.
Besides the losses in stocks and bonds, NSSF also lost Rmb582.3 million in derivatives and Rmb183.5 million in foreign exchanges.
Notably, its outsourced assets reached a record high of 66.77% of AUM, up from 66.18% in 2021. Proportion of overseas investments went up slightly by 0.75% to 9.77%, or Rmb281.8 billion, an Rmb9.45 billion increase from 2021.
Bank deposit was Rmb71 billion, or 2.5% of total AUM in 2022, up from 1.8% a year ago.
Its investment in derivatives also increased to Rmb186.6 million from Rmb95.4 million in 2021.