Emma Wall: Hello and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Nicholas Yeo, Head of China and Hong Kong Equities for Aberdeen. Nicholas contributes to the emerging markets suite of funds.
Hello, Nicholas.
Nicholas Yeo: Hi.
Wall: So, you are Head of China and Hong Kong Equities for Aberdeen and there has been quite a lot going on in this region over the last couple of months. Extreme volatility over this summer. But since the beginning of October, the market has actually begun to pick up again. Is this the beginning of the recovery?
Yeo: Well, if you look back, in the last few months or even before the last few months, we had a big rally, some people call it a bubble, in the China onshore market. In a way that affected – that had a spiral effect on Hong Kong market as well. So, both markets were lifted on the back of very strong sentiment. And what drove that sentiment, you may ask, was basically government in a way encouraging – I won't say encouraging speculation, but encouraging people to look at the stock market and having a strong stock market actually helps quite a lot in terms of pushing through some of the reforms that they are thinking about.
But I guess it kind of got overdone and market went up way beyond the fundamentals and that resulted in a big correction. And of course, there are a couple of, you can say, policy missteps here and there given that the government could have come in a little bit earlier in terms of monitoring the leverage that is in the stock market.
There is a lot of margin financing, people borrowing money to buy stocks in China which is different from the previous bubbles. So, this time around maybe there could have been more monitoring of debt before it got out of hand. And when a lot of this deleveraging or the reduction of the debt by the investors happened in the last few months, you could see that the market came down a lot. And then the government stepped in. Government stepped in in a way to support the stock market.
So, is this the beginning of the recovery? I mean, in a way you could see that the government stepping in has prevented the fall to maybe a more realistic level – or I won't say realistic, but a level that is much more market-driven rather than decided by the government. So, there is still a possibility of a let down from here and there are still stocks that are relatively, in our view, overpriced.
Wall: So, a correction though sort of lends itself to the idea that it's a one-off event. So, I think the market and investors can swallow that. If it's a correction, it's a one-off event and that means we're on even keel now. Does that mean that we won't see what we've seen over the last three months, over the next three months and the three months after that? Are we on a more an even keel?
Yeo: Well, because of the stepping in by the government that in a way artificially kept the market stable. But once this is off – but of course, we do not know when the government will come off from the stock market in terms of supporting the stock market. So, once that comes in, we could see market become maybe finding its ground on its own. There could be volatility from here, I mean, continuing to have volatility from here.
Will we see the same type of volatility? It's hard to say because it has been very volatile. So, could it be more volatile? Maybe the chances are a bit lower now because people are much more realistic, the prices have come down. There could still be some more correction, but I guess the volatility may not be as much as what we have seen in the last few months. But having said that, the more important thing is that companies or stocks in China are still relatively overpriced. Some of them are overpriced but some of them are really relatively cheaper.
And where can you find the cheaper ones? It's actually down here in Hong Kong where the market is a lot less retail driven, is a lot more institutional. So, even though it participated in the rally, it wasn't as crazy as what happened in the Mainland China. So, I think there is much more rationality in the Hong Kong market and for investors Hong Kong is probably a better place to look at some of the Chinese or Hong Kong companies where valuations are a lot more realistic than what you have in China.
Wall: Of course, the Shanghai Hang Seng connect, the idea is that at some point the Hong Kong listed stocks and the China listed stocks will be on par in terms of valuation. So, you are saying it hasn't yet happened and actually, that's quite a good thing because we can see some investment opportunities in Hong Kong?
Yeo: Yeah, yeah, it's a good thing and – I mean, the Stock Connect, which is what we call it, the mutual access between the two markets, has not really taken off in a big way. I mean, there was a lot of money going up, there is still money going up from Hong Kong into Shanghai but has less of that coming down that way.
So, that has resulted in markets in Hong Kong being relatively cheaper than what you have in Mainland – onshore China securities. So that's where you can find stocks that are cheaper. But I wouldn't say that it's the same scenario or same situation for all dual-listed stocks. There are actually some A share companies that are cheaper. It's the other way around. So, you really have to be very selective. In this market where there is a lot of volatility you really have to be very selective on what you invest in. So, I think given the environment that we have in China being selective and being very careful with what you invest is probably very, very important.
Wall: Nicholas, thank you very much.
Yeo: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
