The opacity of China’s markets is scary and foreign investors will likely have to pay for the downturn in the country, says Henderson Global Investors’ Glen Finegan.
Finegan, head of emerging market equities at Henderson Global Investors, says there could be “global ramifications” of the reset in China.
“To what extent are external funders going to have to wear some of this pain. There could be global ramification to a reset in China,” he warns.
“When I look at China it is the opacity of the place that scares me. I don’t know how breakneck growth was achieved, how it was funded and how much external funding was involved,” he adds.
“I don’t think China has gone away, it has just reset, but if it’s internal it can probably sweep it under the carpet but it’s where China interacts with the rest of the world that makes me a bit nervous,” he says. “We’re not ignoring China, it’s just finding the companies.”
For this reason Finegan only has very limited China exposure in his portfolios at Henderson, where he runs the $46.5m Emerging Market and $46m Latin America funds.
China-based Fuyao Glass was added to the fund in the fourth quarter last year, as Finegan believes the company meets his corporate governance requirements and that the fund is truly privately controlled.
Finegan stills believes in the rise of the Chinese consumer and is looking for ways to access this growth market. But he discounts the so-called BAT companies: Baidu, Alibaba and Tencent, which have become popular with investors.
In particular, he dismisses some of the hype around Tencent. “It’s got its own acronym, and when there’s an acronym it’s usually too late. But on top of that the valuation is quite high and as a minority shareholder you are unable to buy the same shares the controlling shareholders own. As a minority shareholder you are very much lower down the pecking order,” he says.
Finegan joined Henderson in January last year, coming from First State Investors. In the 10 months he has run the Henderson Emerging Markets Opportunities fund, to end of November, the fund has delivered a 10.9 per cent loss against the benchmark loss of 13.4 per cent.
However, Finegan thinks the extreme pessimism in other areas of emerging markets may be fully played out, with countries such as South Africa and Brazil having all the bad news priced in.