Leading emerging markets investors First State are bearish on China – admitting they “cannot remember” the last time they were positive on the dragon economy.
Speaking at a briefing hosted by the First State Stewart Asia team yesterday, Martin Lau of the Gold Rated First State Asia Equity Plus Fund said that the team has been dubious of China’s economy growth for years, leading to a limited exposure to China in their portfolio.
“We have between 8-10% direct exposures to China, which is quite limited when compared to the 20% exposure in the benchmark,” Lau said, insisting that they never “look at the benchmark” while adjusting their portfolio’s holdings. Instead, Lau is looking elsewhere in Asia; the fund has 20% of exposure in India, 15% of exposure in Taiwan and 13% of exposure in Hong Kong.
China is Too Big to Achieve Greater Growth
China has never been a compelling economy according to Lau: “It’s a structural problem, the country is too big. When China is already the second largest economy in the world, it simply cannot grow bigger by 6 to 8% every year.”
The shrinking population in China also threatens the economy; thanks to the one-child policy implemented three decades ago the country now has a rapidly ageing population.
Alongside unsupportive demographics, there is also too much debt in the system, Lau added.
“China’s corporate system is rigged to support the state-owned players which makes it very hard for private companies compete against them, especially in the small cap space,” Asquith said, “Valuations are better than they were, but fundamentally the businesses remain unattractive from a bottom-up perspective.”
Likewise, Lau said he holds a very firm stance of not owning banks and insurance companies in their portfolio, reflecting their negative view upon these sectors based on a bottom-up perspective.
“Whenever People Are Too Negative It Becomes Opportunity”
However, there are a few opportunities in China, said Lau, as “whenever people are too negative it can become an opportunity”, and especially with Asian stock markets are falling – Lau and his team are currently deploying some cash into the Asian market.
One of the opportunities in China was the outbound tourism which was fuelled by a rise of living standard in China.
“Last year, tourist spending outside China, depending on which country you are looking at, nearly doubled,” Lau said. As a result, the Gold Rated investor purchased Shanghai International Airport (600009).
“Outbound tourism is a long term trend, and people need to go through airport unless they travel ferries and buses,” Lau said.
Another attractive sector in China that Lau believed it would “do something different” was long term trend towards automation.
Currently the best automation companies are found in Japan but Lau believes China might be able to do something different with of their automation strategy, creating multi-decade investment opportunities.
Lau’s First State Asia Equity Plus Fund has generated 11.8% return over the past 10 years and Morningstar analyst Germaine Share said that this outperformance came at notably lower volatility relative to both peers and the benchmark. The fund has an ongoing charge of 1.58%, which is 22 basis points cheaper than the Asia-Pacific ex-Japan equity Morningstar Category median, giving the fund an additional competitive edge.
