Asia managers clash on the outlook for China

Top fund managers talk to Joanna Faith about the biggest drivers of growth in the Asia Pacific sector

The spectacular growth story of many economies in the Asia Pacific region has dominated the investment world for much of the last decade. These countries provided a welcome respite for investors fleeing embattled developed markets in the aftermath of the 2008 financial crisis. However, it hasn’t all been plain sailing. High inflation, concerns about asset bubbles and political instability have hurt the region this year.

The MSCI Asia Pac index is down 10.56% year to date to 10 November, compared to the MSCI World which is down 5.49% over the same time period. Retail sales into the sector have also suffered. Asia Pacific ex Japan was the worst selling sector in September, according to the IMA.

Soaring inflation and an expected slowdown in growth in China have been big contributors to lacklustre investor sentiment. However, things are looking up. China’s inflation fell sharply in October to 5.5% from September’s 6.1%, the biggest drop since February 2009, a support to a weakening growth outlook.

Moreover, even if growth levels fall in the region, they are likely to continue to trump those of developed markets.

Bullish

Tony Yousefian, investment director at OPM Fund Management, is bullish on China. He says the components that have given rise to inflation are dropping off and the government is experimenting with different ways to stimulate the economy at business level. One measure is a simplification of the tax system.

“China has an onerous tax system for corporates based on turnover,” says Yousefian.

“Now the government has reduced the turnover tax and introduced VAT in Shanghai which is a massive positive for businesses.”

Emerging market star Mark Mobius, manager of Templeton Asian Growth, is also sanguine about China. His fund is one of the top performers in the sector, returning 128% over three years compared to a sector average of 77%, according to Morningstar. At 28% of the portfolio, China is his biggest holding, almost on par with the index. He believes a lot of the talk about property bubbles is overdone.

“We know property prices will come down by 15%-30% depending where you are in the country,” he says.

“The banks will have an increasing amount of non-performing loans, maybe going from 1.5% to 3%. A lot of local governments also have problems because they overspent. But these are all solvable problems. It’s not going to be a subprime problem like we had in the US.”

Mobius says the problem with the Chinese market is over supply.

“Last year the IPO market was huge. The total amount raised in IPOs in emerging markets was about $460bn and almost half of that was from China. We had an enormous oversupply of equities coming in which tends to depress the market.”

Within the country he is bullish on oil companies. He has 6.8% in PetroChina, his biggest holding.

He is also still encouraged by the Chinese consumer story, despite the fact valuations look stretched in many cases.

“It is very difficult to find really cheap consumer names so we have to be patient and wait. The summer sell-off has opened up opportunities in the space however.”

He particularly likes automobile companies.