Chris Hogbin, Global Head of Investments, AllianceBernstein: Very optimistic about Chinese assets in the medium to long term

China Fund News reporter Wu Juanjuan

A few days ago, Chris Hogbin, global head of investment of AllianceBernstein Group, said in an exclusive interview with this newspaper in Shanghai that he is very optimistic about the Chinese market for a long time. China has attractive opportunities for fundamental investors. He said that with the transformation of China's economy to high-quality development, the style of the Chinese market will also change. In the future, China will no longer be the "dominant" market for growth stocks, and opportunities for other styles of investors will also emerge.

AllianceBernstein is headquartered in the United States. As of the end of the second quarter of this year, its management scale was nearly 770 billion US dollars, equivalent to more than 5 trillion yuan. With offices in 27 countries and territories around the world, it is known for its active management, innovation and diversified investment solutions. Chris Hogbin has 26 years of experience, including 19 years with AllianceBernstein.

联博集团全球投资主管Chris Hogbin

United States economy may achieve a soft landing China Fund News: Recently, the Federal Reserve announced a 50 basis point cut in the federal benchmark interest rate. What do you think of this initiative? Chris Hogbin: The logic for cutting rates is simple and straightforward. Inflation has fallen, inflationary pressures in the economy have eased, and the labor market has shifted to a more balanced state. The Fed believes that the current interest rate is well above the neutral level and that it is appropriate to take the initiative to cut interest rates.

The Fed believes it can act earlier and achieve lower interest rates without causing a recession. With the opening of the rate cut channel, both fixed income and equity investors have the opportunity to increase their capital, and lower interest rates can help revise earnings expectations across sectors.

China Fund News: There are two ways for the market to interpret the Fed's interest rate cut. One is that Powell is increasingly confident in controlling inflation, and the other is that there may be some worrisome signs in the labor market. What do you think? Chris Hogbin: The labor market has slowed down, but it's still healthy. Consumers have already burned off the extra savings they have accumulated during the pandemic, but are still enjoying real wage growth. This, coupled with the Fed's interest rate cuts, can support a strong economy and achieve a soft landing transition to a mid-to-late economic cycle.

Our hypothetical baseline scenario is a soft landing for the United States economy in the next 12~24 months. Stagflation cannot be ruled out entirely, but we are not overly concerned about recession risks at the moment.

China Fund News: What are the economic indicators you pay attention to? Chris Hogbin: The soft landing will be driven by a continued strong and resilient job market. This will also be a boon for consumers when interest rates fall. We will be keeping a close eye on the job market.

We also need to consider other possibilities. Is it too late for a more aggressive rate-cutting cycle to deal with the underlying weakness in economic fundamentals? If inflationary pressures do not subside as expected, will the economy stagflation? This is also something that we cannot completely rule out.

China Fund News: What do you think of the United States housing market? Chris Hogbin: Because of the typical long-term fixed-rate loan model in United States, when people need to sell their property and refinance, they have to bear significantly higher interest rates. As a result, the trading volume drops significantly. If interest rates continue to fall in the next 12~18 months, this may help the housing market return to a relatively balanced state, and the current situation is somewhat unbalanced. China Fund News: As the Fed enters an easing cycle, it usually means a weaker dollar, which is usually good for emerging markets. How will the exchange rates of emerging market countries play out this time? Chris Hogbin: A weaker dollar usually provides a favorable environment for emerging markets to perform. Different emerging markets are at different stages of the economic cycle, and changes in interest rate differentials will affect the exchange rate trend. It's important to note that spreads aren't the only variable for global money. In the case of the Chinese market, we also need to consider the impact of institutional capital flows. We are very optimistic about China's bond and equity markets in the medium to long term. At present, the allocation of international investors in China is still low. The investment decisions of international investors are influenced by many factors. Sometimes, spreads indicate that there can be an increase or a decrease in allocation, and real flows may move in the opposite direction. Because money flows affect exchange rates, it is difficult to make accurate predictions about short-term exchange rate movements. China Fund News: In the past two years, global investors have allocated a lot of money to United States stocks. Will this trend be strengthened or weakened as the Fed enters its rate-cutting cycle? Chris Hogbin: For the past two years, the United States stock market has been dominated by a very narrow area – the so-called "US Seven." The market is moving towards fragmentation, and in the interest rate cut cycle, diversification will have a beneficial impact on the equity market. In addition to the "Seven Heroes", there are many attractive companies in the market. As market expectations for the growth of the Seven and their own economies of scale wane, the rest of the United States stock market still has the potential to continue to drive overall performance. Our portfolio is focusing on these relatively neglected areas. In a rate-cutting environment, they have attractive earnings correction opportunities. Of course, we also need to continue to focus on the outstanding "Seven Heroes".

Finally, while we are relatively bullish on the United States equity market, one should also look outside the United States, where there are exciting investment opportunities.

China Fund News: As the Fed enters a cycle of interest rate cuts, do you think that in terms of factor style, value, size or quality factors will have an advantage in the United States market? Chris Hogbin: In the mid-to-late stages of the economic cycle that we're currently in, the quality factor tends to perform better. That said, investing in high-quality companies with competitive advantages and relatively stable cash flows, while focusing on valuation soundness, may be a good strategy. It should be noted that the "US Stock Seven" also includes many high-quality companies, so it does not mean that they should be completely abandoned. Our focus is on finding more opportunities in an increasingly fragmented market, and this is where we can bring value to our clients as active managers. China Fund News: What is your view on the Japan stock market? Chris Hogbin: The Japan market is showing a trend worth watching, with Japan companies improving their return on equity and underlying corporate governance improving. This is due in part to corporate governance reforms across Japan. As ROE rises, so do equity valuations.

At present, there is still a considerable gap between the return on equity of Japan companies and some other markets. Although the market generally expects the average return on equity of Japan companies to increase from 8%~9% to 11%~12% in the next 3 years, this is still only half of the United States market. Japan needs to do more. At the corporate level, efforts are needed to close this gap in areas such as corporate governance and structural reforms.

Japan's economy is already showing signs of escaping its long-term deflationary woes. As United States cuts interest rates and Japan begins to raise interest rates, exchange rate changes will also have an impact in the medium term.

Attractive opportunities can be found in ChinaChina Fund News: Global investor sentiment towards the Chinese market is relatively sluggish. What catalysts are needed for global investors to return to the Chinese market? Chris Hogbin: When we talk to global investors, the earnings of the stock market are usually the first thing they look at. Second, they focus on China's real estate sector. In our view, while the property sector may remain weak, it is gradually coming out of the woods, and the drag on the economy from real estate is decreasing. In addition, there are many interesting areas in the Chinese economy. For example, valuations in the industrials and consumer sectors look quite attractive after four difficult years. In the medium to long term, we remain quite optimistic about the Chinese market, and the key is to find the right investment direction and areas. China's economy is more complex and diverse today than it has been in decades. China Fund News: Can you elaborate on why you are optimistic about the consumer industry? Chris Hogbin: We take a value-oriented approach to investing in Chinese equities, rather than chasing growth. Value investing is all about looking for companies with attractive fundamentals, reasonable valuations, and clear catalysts. Given the current valuation levels, we believe there are a lot of opportunities to be tapped in the consumer space. In the past, most global investors entered the Chinese market with the intention of seeking growth. However, as China's economy enters a new phase of development, in the next 10 years, China will need not only growth investors, but also investors who are good at other investment styles. When economic growth is at a high speed, growth investing is indeed highly sought after. But as growth slows, adopting a different investment style may capture more attractive opportunities. China Fund News: How do you view China's economic transformation? Chris Hogbin: A lot of people are trying to simplify the process, thinking that China is going to move from being export-oriented to being demand-driven. But in fact, the situation is much more complicated. It's clear that China has had great success in many industries. For example, China's leading position in new energy vehicles, technology, and some export industries will support China's transition to the next stage of development. China Fund News: Can you share your key investment ideas in the Chinese market? Chris Hogbin: AllianceBernstein has been involved in the Chinese market for a long time. In the past few years, we have set up a mutual fund company in Shanghai and completed our first fund raising earlier this year. Our team is committed to bringing AllianceBernstein's global capabilities to the local market. The key to achieving this is to combine in-depth fundamental research insights with quantitative analysis to identify and capitalize on opportunities in the Chinese market. It is with this approach that we have identified attractive investment opportunities in sectors such as consumer and industrials, and have built a relatively broad and diversified portfolio. China Fund News: What are the most common questions that customers ask you about the Chinese market? Chris Hogbin: Clients usually ask two questions: one is about the real estate industry, how long will the real estate problem last, and what are the potential risks; The second is when the government will introduce stimulus policies.

However, while these questions are important, it is more critical to identify attractive opportunities for individual stock investments. Given the breadth of the Chinese market, we see a number of opportunities, especially at the current relatively low valuation levels.

Unique insight is the core competitiveness of equity researchersChina Fund News: How do you use generative AI? Chris Hogbin: In terms of investment business, we're more of an analytical AI. For example, AI is used to analyze meeting minutes and generate signals to alert investment managers to changes in sentiment. In terms of generative AI, we currently focus on non-investment practices such as client communications, legal and human resources, such as assisting with contract drafting. This year, we also appointed a Chief AI Officer to lead the team in driving AI adoption. In the investment business, we are not currently using generative AI, but are using more analytical AI to improve the efficiency of analysts and fund managers, so that they can spend more time analyzing and thinking rather than collecting data. China Fund News: Why did you decide to create the position of Chief Artificial Intelligence Officer? Chris Hogbin: AI has the potential to revolutionize the way businesses operate, and we're still in the early stages of that transformation. If individual business units are left to explore on their own, they may not be able to give enough attention to AI applications. Therefore, we want to put one person in charge of the company's activities in AI, to coordinate all aspects of the work, and to explain the potential of AI to all employees and encourage them to try it out.

As someone interested in economic history, I've always been interested in technological change. Although there is often a fear that technology will affect employment, technology ultimately upskilles. AI can help analysts quickly review and summarize meeting minutes, saving time and allowing them to focus more on creating value. So, I'm optimistic about that. We just need to embrace AI so that we can focus our time on more valuable activities.

China Fund News: In the era of artificial intelligence, what new skills are needed for stock research? Chris Hogbin: The core qualities needed to be a good equity researcher haven't changed. However, with the development of AI, we need researchers to have more technology-related skills and a willingness to embrace new technologies. The value of AI is that it can improve their productivity and give them more time to think and analyze rather than just collecting data. Therefore, when introducing talents, we will pay more attention to the quality of this aspect.

For stock research, the core is still unique insight and thinking ability. Investing is hard work, and there's a lot of information to digest and absorb. A deep understanding of the key factors that drive change and the formation of your own unique perspectives is a kind of creative thinking and judgment that AI is hard to replace.

China Fund News: Please tell me what are the three major risks that you are focusing on now? Chris Hogbin: First of all, the United States labor market, if there's significant volatility, that's a significant risk. The second is inflation. While we believe inflationary pressures have eased substantially, we need to keep a close eye on them. If these two factors occur at the same time, causing stagflation, it will be a completely new environment. The third is United States the upcoming elections, the outcome of which is very uncertain. Different outcomes can also have a significant impact on policy in certain sectors or regions, and we are keeping a close eye on this. Overall, all three of these risks are closely related to the United States market.

Editor: Captain

Review: Xu Wen