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Can the Pru prove Cathie Wood and George Soros wrong on China?

Chinese business & finance updates

There can’t be many things that would unite the star investors George Soros, a liberal-minded billionaire who survived the Nazi occupation of Hungary, and Cathie Wood, the Trump-supporting Redditor-loved boss of Ark Invest.

But Xi Jinping has done it. Both Soros and Wood last week warned of the profound changes the Chinese president is making as he implements a suite of policies to curb capitalist profits and boost social justice.

Wood said Ark had reduced its investments in China “dramatically”. Soros described investing there as a “tragic mistake”.

So the timing of Prudential’s pivot to Greater China and Asia is interesting. The UK-based insurance group on Monday completes the second stage of its break-up. Having spun off its British asset manager M&G two years ago, it has now done the same with its US business, Jackson.

The Pru, as a result, has become yet another example — alongside HSBC and Standard Chartered — of a UK-anchored financial services group that is predominantly reliant on its Asian operations for growth and profitability, with China increasingly the driver. In the first half of the year, nearly a third of the group’s $2bn of ongoing operating profits came from Greater China.

Will it manage the tensions of being western-based and eastern-focused any more easily than the banks?

Although HSBC and StanChart have powerful growth engines in the emerging markets of Asia and elsewhere, they have underperformed global peers, particularly so over the past few months, as China has cracked down on free enterprise and Covid restrictions have hampered the movement of people in the region.

As banks, with headquarters and top bosses based in London, they are seen as particularly vulnerable to extreme geopolitical tensions between China and the west. Both banks have registered share price growth of close to 15 per cent over the past year, but that has been dwarfed both by global peers and the best locally grounded Asia specialists. The MSCI Global Banks index is up 41 per cent.

The Pru didn’t necessarily plan to follow the HSBC/StanChart playbook. Though it has been strategically focused on Asia growth for years — particularly under former chief executive Tidjane Thiam and more recently under Mike Wells — the shedding of the big non-Asian parts of the group only came after significant investor pressure, led most recently by Daniel Loeb’s Third Point hedge fund. 

Since that campaign began 18 months ago, the shares have jumped 50 per cent, though the stock’s benchmark outperformance has been more modest, particularly recently, and AIA, its Hong Kong-based rival, remains more highly rated.

Some of that discount is surely down to the Janus-faced awkwardness of its set-up. On top of the tensions that the banks have to contend with, the Pru has an out-of-kilter shareholder base: less than 10 per cent of investors are in Asia; 40 per cent are still in Europe, mostly the UK. A small planned capital raise to strengthen the balance sheet is unlikely to shift the balance significantly.

Other uncertainties remain. What, for example, will Xi’s swerve towards social justice mean for insurers, particularly the foreign owned ones? Demand for health and protection products is certainly booming as incomes rise and the Pru seems confident it will continue to find political favour. But might profit margins come under pressure?

And what of the quasi-colonial management set-up? As one senior figure at HSBC, whose chair, chief executive and global head office are all still London-based, advised the newly refocused Pru: “Asia is energising. Absorb Asia. Don’t be an observer.” 

The insurance group insists there are no plans to move its London domicile to Hong Kong. But already, despite the daunting geopolitical climate, it is embracing its new Asia focus.

Since Shriti Vadera took over as chair in January, she has appointed three new non-executives from Asia to the board. The tally of head office functions now run out of Asia has soared to 60 per cent and will go higher post-Jackson. 

Vadera herself, Ugandan-born to Indian parents, is the archetypal global citizen and may choose to relocate to Hong Kong once circumstances allow, say friends. And if Wells departs as chief executive next year, as some predict, his replacement could well be based in the region, too. Whether the greater coherence that could provide trumps the political risk of a stronger tether to China will be a question for investors to decide.


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