How Ping An plans to navigate a volatile market

Ping An, the parent company of the second-largest lifer in China, will focus on investing in assets that can give stable returns and lengthen asset durations as it braces itself for increasingly volatile market conditions.

The fast-spreading coronavirus will have an impact on Ping An’s investments in the near term. It is expected to bring volatility to China’s financial markets and drag down economic growth, Timothy Chan, chief investment officer of Ping An, said in a video conference to announce its 2019 results on Friday (February 21).

Timothy Chan

However, he said the medium-to-long term risk is still manageable and that Ping An’s investment assets remain of good quality. The financial group is capable of delivering stable returns in the future, he said. 

Ping An’s net investment yield for 2019 was 5.2%, the same as it had been for the previous year. In the fixed income space, Chan said preferred shares and perpetual bonds look to be good future investment options for the firm. Ping An started to consider investing in these new types of products last year.

Ping An's life and health insurance businesses made up two-thirds of the group's profit in 2019. It has Rmb3.21 trillion ($456.04 billion) in insurance investment funds, and had respectively invested 3.6% and 0.6% of its assets in preferred shares and perpetual bonds at the end of 2019, up from 2.9% and none at all a year earlier. (see table below)

In comparison, its allocation in non-standard debt, which includes debt investment schemes and wealth management products, fell by 2.4 percentage points to 13.4% over the same period. The allocation into alternative debt had already dropped a great deal in mid-2019, as regulations governing riskier products were tightened and amid a dearth of suitable assets in China.

Chan also said that Ping An’s duration gap, or difference between the average duration of its assets versus liabilities, now stands at 3.1 years, with its liability and asset durations standing at 8.6 years and 5.5 years, respectively. The group will seek to further shorten the duration gap in the future, mostly by investing in long-term government bonds.

Ping An has Rmb930 billion invested in government and other low-risk bonds. The long-term asset has a tenure of above 15 years, he said.

In equity, Ping An will continue to concentrate its investments in a basket of low-valuation, high-dividend stocks, which are mostly the leading firms in their respective industries, said Chan.

Ping An is the first and only Chinese insurer to have adopted International Financial Reporting Standards 9 (IFRS 9), and the insurer said in 2018 that it preferred value stocks with higher dividends as the price of these stocks tends to be more stable. Dividend income can also help to mitigate the impact of fluctuations in fair value.

In addition, Ping An has been looking to invest in new types of real estate investments in the past two years, such as rental apartments and office buildings. These long-term illiquid alternative assets help to match liabilities, said Chan.  

Source: Ping An (click for full view)

INVESTMENTS ARE KEY

China’s economy is mainly driven by the three horse-wagons of consumption, export and investments, but Chan said during the media briefing that investments will play a bigger this year amid multiple headwinds.

He noted that the impact of the coronavirus means that it will take some time for consumption to recover, he said. And while the US and China have reached a truce around trade after signing a phase 1 trade deal, Chan said there will still be a lot of “noise”, likely referring to disagreements in the trade negotiations. That is likely to continue affecting export volumes.

As a result, investments are still the key, he said.

Chan did not elaborate on what type of investments the nation could make, or the financial group could seek to take advantage of. However, China has traditionally depended a lot on infrastructure investments to shore up the economy.

For instance, the nation turned to tailor-made local government debt to fund infrastructure projects to support the economy in August 2018, requiring local governments to meet an issuing quota of Rmb1.35 trillion in two months. Some economists believed that it was a pre-emptive measure to counter the trade war.

In monetary policies, Chan expects the People’s Bank of China will cut its benchmark interest rate another two to three times this year, while it could cut the loan prime rate (LPR) by 20 basis points to 30 basis points. The one-year and five-year LPR now stand at 4.05% and 4.75%, respectively.

Despite the impact of the current conditions on China’s economic growth rate, the CIO believed Beijing will press ahead with its reform plans. Reforms in state-owned enterprises, supply-side reforms and financial reforms will pick up speed, he predicted.