China's Ping An Insurance is quickly building its holdings of Hong Kong stocks but has slowed its allocation to foreign assets generally, even as its investable assets pass the $300 billion mark.

The insurer's foreign allocation has only grown 0.8 percentage points since the end of 2016, less than half the 1.8 percentage point rise in the second half of last year.

Timothy Chan, chief investment officer, said the second biggest mainland insurer would be very cautious about overseas investments, speaking at its first-half results press conference on Friday.

He cited as positive elements for the markets this year: global reflation; the economic recovery in the US and Europe; and the strong US labour market, which supports consumption.

Rising caution

But there are things to watch out for, Chan warned, including the US Federal Reserve's plan to shrink its balance sheet, the potential tapering of quantitative easing in the Europe and the expected shift from rising to falling consumption worldwide.

On top of that geopolitical tensions on several fronts have sparked heightened jitters among investors. Perhaps most notably, there has been the stand-off between the US and North Korea in recent weeks, and general uncertainty over American policy under President Donald Trump. That's not to mention the terror attack in Spain last week, which caused European stocks to dip.

In addition, there remain strict capital controls in place currently to prevent money flowing out of China, such as Beijing's freeze on the qualified domestic institutional investor (QDII) scheme. Indeed the biggest local insurance firm, China Life, has said that the controls have been preventing it from allocating more overseas as it looks to diversify its portfolio globally.

Still, some industry observers suggest insurers will be able to start investing offshore again possibly as early as next month, with their focus likely to be on foreign private equity.

To be sure, Ping An is keen to find profitable homes for its fast-growing pool of capital. The insurer's AUM swelled 12.6% in the first half of the year to Rmb2.2 trillion ($324 billion), and yet it still has just 6.8% of that in offshore assets, most of which is in Hong Kong stocks.

In the first half of 2017, Ping An boosted its allocations to equities (by 3.4 percentage points to 11.8%), bonds (by 1.9 percentage points to 46.2%) and wealth management products. It alternatives exposure rose by 0.9 percentage points to 20.3%. (See chart below.)

The firm cut its exposure to term deposits, debt plan investments, preferred shares and cash. Cash saw the most notable drop, by 1.9% percentage points to 6.3%.

Ping An's asset allocation  

Source: Ping An; Click for full view

Chan said Ping An's asset allocation would largely remain as it is now through to the end of the year.

Hunger for Hong Kong stocks

In the first half Ping An adjusted its portfolio to add exposure to renminbi bonds and Hong Kong equities (through the Stock Connect trading link), said Alex Ren, president of Ping An Group at the press conference on Friday.

The growth in equity exposure is mainly down to Ping An's fast-rising allocation to Hong Kong stocks, which as of June 30 accounted for around 90% of Ping An's 6.8% allocation to overseas assets and therefore about 6% of total AUM. That represents a jump from the 4% exposure as of end-2016, which followed a 2-3 percentage point rise in the second half of last year.

The Hang Seng Index has performed strongly this year, having gained 22% as of August 18, though there are concerns in some quarters that a correction is coming.

Aside from Hong Kong stocks, the insurer's overseas portfolio is run by international asset managers and mainly invested in private equity and infrastructure, Chan said.

Healthy yield

Ping An recorded gross annualised investment return of 4.9% in the first half of this year, a drop from 5.3% in 2016 but up from an annualised 4.4% in the first half of 2016. This was boosted by its equity investments making a profit of Rmb25 billion in the first half of this year, up from a loss of Rmb11 billion in the second half of 2016.

On the debt side, in light of Chinese interest rates rising, Ping An has extended the duration of its bond portfolio to 7.9 years from 7.5 years during the first half of this year, said Chan. The one-year Shanghai interbank offered rate increased to 4.4010% as of August 18, from 3.0275% on October 18, 2016.

Non-standard debt

Meanwhile, in the first half results Ping An released details of its non-standard debt portfolio for the first time, as many people are concerned about the risk it contains, Ren said. It includes infrastructure, non-bank financial institution (FI) and real estate debt. Its weighting in Ping An’s total AUM fell slightly by 0.1 percentage point to 13.1% in the first half.

Ping An’s strategy for such assets is to avoid high-risk industries and areas and to diversify its allocations, said Ren, without specifying which industries he was referring to. So far there has been zero default in its non-standard debt assets, he added.

As of June 30, infrastructure accounted for 56.9% of the non-standard debt portfolio, non-bank FIs 27.7%, real estate 12.3% and other assets 3.1%.

For more insights on Chinese asset owners, attend AsianInvestor's 4th China Global Investment Forum in Beijing on September 21. For more details, contact Terry Rayner by email or on +852 3175 1963.