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Multi-Manager’s View: China is offering long-term value


As a child of the bear market, I have been used to changing trends but the stark underperformance of emerging market equities versus developed world equities is not something we have become used to in rising markets.

So far in 2013 EM equities have gone their own way, as investors have fretted over growth, inflation and monetary policy.

Indeed, after recent falls in EM equities the valuation and dividend yield gap between EM and developed world equities has risen to levels that have historically led to decent outperformance from EM equities.

Importantly, EM equity sentiment has become notably weak in recent months, in stark contrast to extremely strong sentiment towards the US, fewer worries over Europe and even a warmer feeling towards Japan.

We would suggest that it is time to start re-examining opportunities in EM equities, particularly truly unloved markets such as China.

Valuations in China have fallen sufficiently to at least partially compensate for the myriad of risks that exist in the Middle Kingdom.

We added a China fund to our portfolios late last year and believe that it could be a strong “value performer” in the years ahead.

We are very respectful of analysis from (an ever-increasing number of) smart people that suggests that the financial sector in China has over-extended itself and will suffer from a surge in non-performing loans in the coming years.

We also recognise that the Chinese authorities have shown a determination to curb excesses in the property market and inflation generally.

We are also genuinely concerned by the increasing number of issues that are arising in the wealth management industry in China, where dodgy products backed by dodgy collateral are proving decidedly dodgy.

The question has to be whether we think that such nagging worries are reflected in the price of regional shares and we think they are.

Chinese banks trade on 6-8 times earnings for a reason; nobody trusts the numbers. This distrust has led to opportunities elsewhere in the country and region.

Value is definitely the place to be in EM following the unsustainable outperformance of “quality growth” in the last few years. This is a trend bias that we think will be shared with developed markets, but the juxtaposition between expensive defensives and cyclical recovery in EM equities is extraordinary and could be rewarding for patient investors.

There is a strong chance that the China and EM value call could well look like the new dog in our portfolio in the short term, perhaps replacing Japanese equities as a source of grief from my colleagues.

However, in the long term, we feel convinced that there will be good money to be made from an increasingly out of favour asset class.

Thomas Becket is chief investment officer at Psigma Investment Management


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